Gap Quarterly Profit and Sales Increase

Gap Inc. on Thursday said its fiscal second-quarter earnings rose 5.6% while sales increased 20%, as the San Francisco company aggressively marked down prices at its Gap chain.

The operator of Gap, Old Navy and Banana Republic clothing-store chains reported net income of $69.5 million, or 26 cents a share, beating by 2 cents the average estimate from analysts polled by IBES International Inc. The firm earned $65.8 million, or 23 cents, in the year-earlier period.

The retailer faced tough sales comparisons with last year and some of its clothes weren’t well-received.

Shares of Gap rose 50 cents to close at $43.63 on the NYSE.

Sales in the quarter ended Aug. 2 rose to $1.35 billion from $1.12 billion. Same-store sales rose 4%, down from 9% a year ago. Gap has 1,984 stores, including 983 Gap stores, 24 Banana Republic stores and 536 GapKids stores.

Some of the sales increase came at the expense of profit as the company marked down a variety of slow-selling merchandise at its Gap chain.

Profit margins on goods sold--after rent and depreciation--narrowed to 34.4% from 35.7% in the year-earlier period.

Earnings were helped considerably by two things that had little to do with the company’s day-to-day performance, analysts said.

A share buyback program has reduced the number of shares outstanding by 5.8%, increasing per-share earnings. In addition, a $5-million charitable contribution in the year-ago quarter was accounted for as a sales, general and administrative expense, making expenses much smaller in comparison this year and allowing more money to flow to the bottom line.