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Gap Reports Higher Earnings, Announces $1.5 Billion Buyback

Gap Inc. on Thursday posted a rise in quarterly net profit and said it approved a $1.5 billion share repurchase program.

Gap also raised its fiscal 2007 earnings outlook, and Gap shares , which closed slightly lower at $17.40 Thursday, rose more than 2 percent in extended trading.

Second-quarter net income was $152 million, or 19 cents per share, compared with $128 million, or 15 cents per share, a year earlier. Sales fell 1 percent to $3.69 billion.

Adjusted earnings of 21 cents per share -- excluding cost reduction initiatives -- topped the Wall Street average of 19 cents per share, according to Reuters Estimates.

Same-store sales fell 5 percent overall, down 6 percent at the Gap chain and 9 percent lower at Old Navy. They were up 4 percent at Banana Republic North America.

For fiscal 2007, Gap raised its adjusted earnings outlook to 90 cents to 95 cents from an earlier range of 80 cents to 90 cents. The outlook excludes expenses associated with the closure of Forth & Towne and cost-cutting initiatives.

C.L. King analyst Mark Montagna said Gap's completion of its earlier share buyback and news of the fresh $1.5 billion buyback were both positive surprises.

"It shows the company is confident they've turned the corner at this point. It also reflects on the strength of the balance sheet -- they do have a strong balance sheet," Montagna said.

Gap is striving to reverse a multiyear sales slump that has affected its Gap and Old Navy chains. The San Francisco-based company says it has begun to improve merchandise and is now more carefully targeting consumers in their 20s.

"During the second quarter, we made solid progress stabilizing our business, streamlining our organization and importantly, hiring our new chairman and chief executive officer, Glenn Murphy," said Bob Fisher, who had served as interim CEO before the naming of Murphy.

Murphy spent six years at Canadian drugstore chain Shoppers Drug Mart before coming to Gap.

Gap shares trade at 16.6 times estimated 2008 earnings, a premium to large retailers like Target and Limited Brands, at close to 15 and 12 times forward-looking earnings, respectively. It also trades at a premium to smaller specialty retailers that sell apparel, such as American Eagle Outfitters, valued at 10 times 2008 projected earnings.

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