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Gap shares surged in extended trading after the retailer mounting a turnaround posted better-than-expected second quarter results, led by Old Navy, and lifted its full-year earnings outlook.

Shares in the San Francisco-based company surged as much as 16 per cent before paring those gains to trade 6 per cent higher after reported that comparable sales, a measure of sales in stores that have been open at least 12 months, rose 1 per cent. That represented the third straight quarter of positive comparable sales growth but was slower than the 2 per cent growth posted in the first quarter.

Gap, like other clothing retailers, has struggled to stave off competition from online retailers and fast fashion rivals — like Zara and H&M that copy runway looks at a fraction of the cost — and lure shoppers back to its stores. Moreover, a string of fashion misses at its Banana Republic had also eroded sales at the brand.

Comparable sales rose 5 per cent at Old Navy, the retailer’s largest division, topping expectations for a 3.1 per cent gain. Meanwhile, same-store sales slid 1 at the Gap Global brand and 5 per cent at Banana Republic, compared with Wall Street estimates for a drop of 2.2 per cent and 3.9 per cent respectively.

Net sales slid 1.3 per cent from a year ago to $3.79bn, just ahead of analysts estimates of $3.77bn.

Net income rose to $271m or 68 cents a share in the three months ended July 29, compared with $125m or 31 cents a share in the year ago period, which reflected a 29 cents charge associated with restructuring plans. Stripping out a 10 cent benefit from insurance proceeds related to the fire that occurred on the company’s Fishkill distribution center campus, earnings of 58 cents in the second quarter were better than expectations of 52 cents.

That came as the company noted a fourth straight quarter of gross margin expansion, which improved to 38.9 per cent, from 37.7 per cent in the year ago period.

“With a third consecutive quarter of comp sales growth, we are seeing our investments in product, customer experience, and brand equity begin to pay off,” Art Peck, chief executive, said.

And following the “strength” of the first half the company raised its adjusted full-year earnings outlook to a range of $2.02 to $2.10 a share, up from its previous projection of $1.95 to $2.05 a share. That was above the $2 a share that Wall Street had forecast.

Gap shares are up 1.1 per cent so far this year having tumbled nearly 50 per cent in the prior 2 years.


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