The GapGAP

Key highlights

• Full year outlook raised: The company increased its full year profit forecast to a range of $2.35 to $2.45 per share, up from the previous high of $2.40, even as it slightly lowered its sales growth expectations to 1% to 1.5%. This shift tells owners that management is successfully squeezing more profit out of a tougher retail environment through better cost control.
• Gap brand momentum builds: Gap brand comparable sales, which measure growth at stores open at least a year, jumped 10% this quarter, accelerating from 4% growth a year ago. This resurgence in the namesake brand is a major bright spot and helped offset a 4% decline at Old Navy, which is the company's largest division by revenue.
• Profit margins expanding: The adjusted gross margin, representing the portion of sales left after paying for goods and occupancy, rose to 41.4% compared to 41.2% last year. While the 20 basis point improvement is small, it shows the company is successfully raising average prices across all its brands and relying less on deep discounts to move clothing.
• Aggressive share buybacks: Management spent $601 million to buy back its own shares during the first half of the year, which is a massive increase over the $152 million spent during the same period last year. These buybacks reduce the total number of shares available, making each remaining share own a larger piece of the company's future earnings.
• Inventory control holds steady: Ending inventory remained flat at $2.3 billion compared to last year, which is a healthy sign since total sales only fell by 2%. Keeping inventory levels in check prevents the company from being forced to clear out old styles at clearance prices later in the year.

Our take: This was a solid quarter where financial discipline made up for a slight miss in total sales. The standout success at the Gap brand shows the turnaround is working there, and while Old Navy and Athleta are still struggling, the raised profit guidance for the full year proves management can protect the bottom line. It keeps the recovery story on track for long term owners.