Gap (GPS)

Though Gap was not spared the huge blow that the recession dealt the retail industry, analysts have become more confident about the retailer. The company has been cutting costs to help out its margins and though its August same-store sales decreased, they still beat analyst expectations. Foot traffic at Old Navy has increased due to more value-conscious consumers, and the company has been developing its core brand (Gap) through new products such as its competitively-priced, high-end denim line.

People may look back at at the Gap trading around $15 earlier this summer and in time it may turn out to be the steal of the summer..

Before Glenn Murphy was even hired by Gap I said that if the new CEO was in the Edward Lampert at Sears Holdings (SHLD) or Julian Day at RadioShack (RSH) mold, shareholders would really benefit.

Gap shareholders are going to do just fine under Murphy. Let's not forget, with the exception of Wal-Mart (WMT), retailers are being savaged right now. The fact that Murphy's shareholders (because of the company's results) have escaped that must be telling us something, the plan is working.

Gap (GPS) reported that second quarter net earnings increased 51 percent through the combination of driving healthy margins and effectively managing costs.

For the quarter ended August 2, 2008, net earnings were $229 million, or $0.32 per share on a diluted basis, compared with $152 million, or $0.19 per share, for the second quarter last year.

The 2007 second quarter diluted earnings per share included $0.02 of expenses related to the company’s cost reduction initiatives. Excluding the $0.02 per share of expenses, second quarter diluted earnings per share last year on a non-GAAP basis were $0.21 per share. Please see the reconciliation of diluted earnings per share on a GAAP basis to diluted earnings per share excluding the expenses associated with the company’s cost reduction initiatives, a non-GAAP financial measure, in the table at the end of this release.

“External conditions aside, we continue to deliver improved earnings with healthy margins and I am pleased with our second quarter results,” said Glenn Murphy, chairman and chief executive officer of Gap Inc. “While we continue to pursue our 2008 financial strategy, we are very focused on bringing more customers into our stores.”

If that was not good enough, they backed their full year guidance and also said they are sitting on $1.7 billion in cash after bringing in another $340 plus million during the quarter and buying back 16.3 million shares. Here is an interesting number, 12.3% of the Gap's current market cap consists of the cash it has sitting in the bank.

Over the past year retailer like Target (TGT), Macy's (M), Kohl's (KSS) and JC Penny (JCP) have all seen their profits and share prices (50% decrease in some cases) shrunk. Murphy's Gap has held it's own and it share price, essentially flat over that time reflects that.

Gap shareholders are some pretty happy folks right about now

Gap has great free cash flow, acceptable operating margins (>10%), and solid return on capital employed.

Even if the economy suffers further, everyone needs clothes. This is necessity and Gap has done well when disposal income has fallen. Furthermore, with the revitalized design group, their clothes are more fashionable which should lead to more sales. I'm going to be watching same-store sales very closely for September. It will be Patrick Robinson's first test if he understands the current fashion and market trends.