Gap CEO Discusses Q2 2010 Results - Earnings Call Transcript

Gap CEO Discusses Q2 2010 Results - Earnings Call Transcript
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Gap Inc. (GPS)

Q2 2010 Earnings Call

August 19, 2010 5:00 PM ET

Executives

Mark Webb – Vice President, Investor Relations

Glenn Murphy – Chairman and CEO

Sabrina Simmons – Executive Vice President and CFO

Analysts

Janet Kloppenburg – JJK Research

Connie Wong – Wedbush Securities

Edward Yruma – KeyBanc Capital Markets

Michelle Tan – Goldman Sachs

Lorraine Hutchinson – Banc of America

Evren Kopelman – Wells Fargo Securities

Jennifer Black – Jennifer Black & Associates

Stacy Pak – SP Research

Brian Tunick – JP Morgan

Dorothy Lakner – Caris & Company

Marni Shapiro – The Retail Tracker

Roxanne Meyer – UBS

Presentation

Operator

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Good afternoon, ladies and gentlemen. My name is Bryan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gap Inc. Second Quarter 2010 Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions)

I would now like to introduce your host, Mark Webb, Vice President of Investor Relations.

Mark Webb

Good afternoon, everyone. Welcome to Gap Inc.’s second quarter 2010 earnings conference call. For those of you participating in the webcast, please turn to slides two and three.

I’d like to remind you that the information made available on this webcast and conference call contains forward-looking statements, including those identified in today’s earnings press release, which is available on gapinc.com, as well as other statements that express our expectations, anticipation, beliefs, estimates, intentions, plans and forecasts. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements.

Information regarding factors that could cause results to differ can be found in our annual report on Form 10-K for the fiscal year ended January 30, 2010. Investors should also consult our quarterly report on Form 10-Q for the quarter ended May 1, 2010, and today’s press release.

Future economic and industry trends that could potentially impact net sales and profitability are difficult to predict. These forward-looking statements are based on information as of August 19, 2010, and we assume no obligation to publicly update or revise our forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

This presentation includes the non-generally accepted accounting principle measure of free cash flow, which under SEC Regulation G we are required to reconcile with GAAP. The reconciliation of this measure to the GAAP financial measure is included in today’s earnings press release, which is available on gapinc.com.

Joining us on the call today are Chairman and CEO, Glenn Murphy; and Executive Vice President and CFO, Sabrina Simmons.

Now, I’ll turn the call over to Glenn.

Glenn Murphy

Thank you, Mark, and good afternoon, everybody. Before I hand it over Sabrina, let me give you some of my thoughts on Q2. Overall, I would characterize the second quarter for Gap Inc. as a decent quarter. We were able to achieve $0.36 in EPS, which was $0.03 above last year. We were able to leverage the operating margin line in the business by 40 basis points over last year and we did all of that against the challenging backdrop.

Now, with that said, I need to say, that I was disappointed in our inability to generate the sales that we had expected to generate in the second quarter. Because of that, we’ve certainly spent a lot of time over the last four to six weeks meeting with the brand Presidents and their teams to make sure where necessary, we took course corrective action coming into the back half of the year.

There was a heightened level of intensity on those meetings and we spent a lot of time talking about traffic and traffic generating ideas. Our marketing initiatives in the back half, inventory management in the back half, how do we continue to innovate and differentiate ourselves.

And most importantly we talked about the key product initiatives we have coming up and that’s where, I left a lot of those meetings, to be quite honest invigorated. I really liked what I’m seeing from those teams, from the merchant teams, the design teams, what they’re doing on product in the back half, how we’re actually taking our brand proposition to an improved level. So there’s two tangibles in the back half of the year.

First intangibles is what will the macro climate be exactly in the second half, which is out of our control. What is in our control is our ability to execute. This team has executed at a very high level over the last 12 quarters. Now it’s up to us to take these corrective measures from Q2, put them into place and execute into the second half.

Let me now give you my thoughts on each one of the brands. Banana Republic had a three comp in Q2 and that’s the second quarter in a row we’ve seen nice positive comps from that team. As I look what transpired in Q2, one of the big changes that we’ve been talking about for the last year, is they’ve really changed their wearing occasions and I’m seeing a much more appealing offering when it comes to going out and to casual dress attire which is important to Banana Republic.

Big improvement in accessories, which we feel good about as we look towards the back half, really like the marketing that came out this week, hopefully people saw it, life at work, very appropriate for Banana Republic, showing the versatility of the products and the key categories in which they’re pushing towards. So all in all, good performance on Banana Republic, look forward to even more improvements in the second half of the year.

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