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Gap's 3Q Beats But Holidays Could Be Tough

NEW YORK (TheStreet) - GAP (GPS) shares were falling in after hours trading after the specialty apparel retailer beat Wall Street earnings estimates, but reaffirmed previous guidance for the year, suggesting that with massive competition and strong promotions, this year's holiday selling season could prove challenging.

Gap said that fiscal third-quarter net income rose 9.4% to $337 million, or 72 cents a share, from $308 million, or 63 cents a share, a year earlier.

Net sales rose 3% for the quarter ended Nov. 2, to $3.98 billion. Sales were up 5% on a constant currency basis.

Analysts, according to Thomson Reuters, expected the retailer to earn 71 cents a share on $3.97 billion of sales.

However the San Francisco-based company, still in the process of a turnaround, said comparable sales inched just 1% higher in the quarter compared to 6% comp growth in the year-earlier quarter. The meager comp growth could be attributed to minimal, if any, growth at its three largest brands -- Gap, Banana Republic and Old Navy, with only the flagship brand seeing positive 1% growth for the quarter.

Shining bright though was Gap's online sales, up 20% to $589 million for the quarter.

Gap said the cost of goods sold and occupancy expenses rose 5% to $2.4 billion, while operating expenses actually fell in the quarter by 5.6% to $1.01 billion. Operating margin rose to 14.5%, up 100 basis points compared to the year-earlier quarter.

Gap reaffirmed its full-year earnings guidance of $2.57 to $2.65 a share, which implies fourth-quarter earnings of 50 to 58 cents a share. That's below analysts' expectations of fourth quarter EPS of 69 cents a share, according to Thomson Reuters.

Shares were down 2.1% to $41 in after market trading as investors were hoping the fashion retailer raise its guidance, perhaps sending a message about the upcoming holiday season.

Retailers are pushing strong promotions this holiday season to get still strapped U.S. consumers to make purchases. Gap sits right in the middle of the retail landscape, offering apparel and accessories to a wide berth of consumers through its different brands. The company will definitely have to be competitive in order to win market share from those that are essentially throwing things at consumers to get them in the door.

Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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