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Gap Inc. reported a 29 percent increase in second-quarter net income, evidence the fashion retailer's moves to liven up its clothing with brightly colored trendy looks are winning over shoppers.
Gap, which operates stores under its namesake, Old Navy, Banana Republic and Athleta, also raised its full-year profit guidance for the second time since May. The forecast, however, still fell short of analysts' expectations.
The company, based in San Francisco, has struggled for years to reclaim its fashion status. But the latest results offer more confidence that a comeback, started in the first quarter, is taking hold.
The Gap has stepped up its marketing and this spring and summer pushed trendy clothing like brightly colored jeans and tops.
"There was a lot of bright spots inside the business that we feel good about," Glenn Murphy, Gap's chairman and CEO told investors during a conference call late Thursday. "There's been a lot of effort, a lot of energy, being directed to get us to where we are today."
But Murphy cautioned that the chain has to maintain that momentum the rest of the year. One problem that needs to be fixed is that store traffic was down in the quarter, he said.
Gap earned $243 million, or 49 cents per share, in the three-month period ended July 28. That compares with $189 million, or 35 cents per share, in the year-ago period. Revenue rose 6 percent to $3.58 billion in the quarter. Analysts had expected a profit of 48 cents on revenue of $3.57 billion, according to FactSet.
Revenue at stores opened at least a year was up 4 percent for the quarter. By division, the metric rose 7 percent at Gap and Banana Republic and 3 percent at Old Navy. International same-store sales fell 5 percent in the quarter.
The figure on revenue at stores open at least a year — or same-store sales — is a key statistic in retailing because it excludes the effect of opening and closing stores.
Gap has worked hard to turn around its business, from staff changes to new ad campaigns and partnerships with other designers. Among some of the standouts were a Gap Kids partnership with Diane Von Furstenberg and Banana Republic's partnership with AMC's hit show "Mad Men." The Banana Republic division also announced earlier this week that fashion designer Narciso Rodriguez will serve as an advisor to the brand beginning with the fall 2013 collection.
The retailer is also focusing on key merchandising categories in each of the chains that have been its core strength. So at Gap, it's focusing on denim products among others, while at Banana Republic it's been zeroing in on suits.
The Gap brand already had brought back Tracy Gardner as creative adviser. She's expected to make an imprint on holiday fashions, executives have said. Gardner, a former J. Crew executive, worked at Gap and Banana Republic in the late 1990s and early 2000s.
In April, the company named Stef Larsson, former head of global sales for trendy fashion retailer H&M, as president of the Old Navy brand. He'll start by the end of October, replacing Tom Wyatt, who resigned in February.
A February 2011, a management shake-up ended with a new president for the Gap brand, and more than a year ago the chain's design director, Patrick Robinson, was ousted. Gap also established a Global Creative Center and consolidated its marketing in New York.
Meanwhile Gap has been expanding in other countries such as China as it pares back its fleet of U.S. Gap stores by 34 percent by the end of 2013, compared with 2007, not including Gap Outlets. That will leave 700 Gap stores. The company plans to maintain its Old Navy stores in North America, but plans to make them smaller.
The retailer recently opened its first Old Navy store outside of North America in Tokyo.
Active wear brand Athleta, which started out as an e-commerce business, added 11 stores in the quarter for a total of 22. It plans to operate more than 50 stores by 2013.
Based on strong second-quarter performance, Gap expects earnings per share for the full year to be in the range of $1.95 to $2. That compares with its upgraded guidance issued in May of $1.78 to $1.83 per share. Analysts had been forecasting $2.09 per share.
Investors have pushed Gap shares up more than 85 percent so far this year. On Thursday, they slipped 27 cents to close at $34.34, but added 46 cents in after-hours trading. The financial results were released after the market closed.