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Gap shares soar on earnings beat

  • Gap's earnings and revenue for the fourth quarter top analysts' expectations.
  • Gap's Old Navy brand sees significant same-store sales growth during the holiday period.
  • The apparel retailer expects same-store sales overall to be flat to up slightly in fiscal 2018.

Gap on Thursday reported earnings and revenue for the fourth quarter that topped analysts' expectations, as more shoppers picked up items through the holidays from its Old Navy brand.

Its shares popped more than 10 percent in after-hours trading on the news.

Here's what the company reported compared with what analysts were expecting, based on Thomson Reuters estimates:

* Earnings per share: 61 cents, adjusted, vs. 58 cents expected.
* Revenue: $4.78 billion vs. $4.67 billion expected.
* Same-store sales: up 5 percent vs. growth of 1.7 percent expected.

"Our strong positive comp and margin expansion during the critical holiday quarter affirms our balanced growth strategy," said Gap CEO Art Peck said in a statement. "Our outlook for 2018 demonstrates confidence in our strategy and a meaningful step up in earnings capacity for the company."

Gap's net income fell to $205 million, or 52 cents a share, compared with $220 million, or 55 cents per share, a year ago. The company reported a charge of $34 million due to new U.S. tax legislation.

Excluding one-time items, Gap earned 61 cents a share during the period, surpassing Street estimates by 3 cents.

Revenue climbed roughly 8 percent to $4.78 billion, also topping analysts' forecast.

Total same-store sales were up 5 percent, compared with an increase of just 2 percent during the same period last year. Much of that growth stemmed from the Old Navy brand, which saw an increase in same-store sales of 9 percent through the holidays. Banana Republic's same-store sales increased 1 percent, while Gap's results were flat vs. last year, the company said.

On a call with analysts and investors, Peck said the company still saw significant opportunities to add Old Navy stores in under-penetrated markets, as it moves out of less-profitable locations that carry the Gap and Banana Republic banners.

The CEO also called Gap's Athleta brand for athletic apparel "extraordinary," though the company didn't break out specific sales figures for this business. Athleta stores still account for just a small percentage of the company's overall real estate portfolio.

"We believe the decision to increase capital to Old Navy and Athleta is smart and shouldn't be ignored," Jefferies analysts Randal Konik said. "Capital diverted from Gap and BR should drive higher corp. op margins (through mix alone) and [return on invested capital]."

Within two years, Konik added he believes Old Navy alone will account for more than 75 percent of Gap's earnings per share. "Old Navy is a powerful and stable business with off-mall real estate, value pricing, and mid-teens margins."

Looking to the full year, Gap expects to earn between $2.55 and $2.70 per share. Same-store sales are forecast by the company to be flat to up slightly.

"Recent tax reform changes provide a meaningful increase in future earnings," Chief Financial Officer Teri List-Stoll said.

Also on Thursday, Gap announced it was increasing its annual dividend by more than 5 percent to 97 cents per share in fiscal 2018.