Traders unimpressed with Gap's 25% profit jump

Posted Nov 20th 2009 12:20PM by Elizabeth Harrow
Filed under: Earnings Reports, Gap Inc (GPS), Options

Thursday, The Gap Inc. (GPS) reported that its third-quarter net profit totaled $307 million, or 44 cents per share, up 25% from the year-ago period. Revenue for the quarter added 1% to $3.59 billion, while gross margin surged 380 basis points to 42.5%. Operating margin escalated from 11.1% to 13.9%, marking its highest level in 10 years.

The retail issue also announced a new stock buyback plan worth $500 million. About $20 million of that amount will be repurchased from the family of founder Donald Fisher, who passed away in September.

Gap's quarterly profit matched analysts' expectations, but traders seem unimpressed by the results. GPS was fractionally lower Friday morning to trade south of $22, with the shares dipping below their 10-week moving average.

Prior to the earnings report, option players loaded up on bearish bets on GPS. During the course of Thursday's session, traders on the International Securities Exchange (ISE) bought to open 4,800 puts on the stock, compared to just 2,628 calls. Most active was the November 22 put, where 8,481 contracts crossed the tape -- most of them near the ask price, around $0.55.

While GPS has trekked lower, these puts have lost value due to the effects of imploding volatility and pre-expiration time decay. Currently, they're bid at about $0.35.

Elizabeth Harrow is a senior equities analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.

Tags: Donald Fisher, earnings, Gap, GPS, inthenews, options