(RTTNews) - Specialty retailer Gap Inc. (GPS: News ) said Thursday its third quarter profit increased 25% from last year, driven by higher margins and improved sales at Old Navy stores. Quarterly earnings were in line with analysts' expectations, while revnues came in ahead of estimates. The company's board has also authorized a new $500 million share repurchase program, effective immediately.

The San Francisco, California-based company posted net earnings of $307 million for the third quarter, up 25% from $246 million in the prior year quarter. Earnings per share rose to $0.44 from $0.35 in the previous year quarter. On average, 26 analysts polled by Thomson Reuters expected the company to report earnings of $0.44 per share for the third quarter. Analysts' estimates typically exclude special items.

As a percentage of sales, gross margin increased by 380 basis points to 42.5%. Operating margin improved to 13.9% from 11.1% in the year-ago quarter.

Third quarter net sales increased 1% to $3.59 billion from $3.56 billion in the same quarter last year. Twenty-three analysts had a consensus revenue estimate of $3.58 billion for the third quarter.

Comparable store sales for the quarter were flat, compared to a 12% drop a year ago.

Segment wise, sales at Gap North America dropped 8% to $987 million with a 7% decline in the comparable store sales.

Banana Republic North America sales fell 4% to $541 million, while comparable store sales decreased 6%.

Sales of Old Navy North America improved 8% to $1.3 billion, as its comparable store sales rose 10%.
International sales grew 2% to $378 million, but comparable store sales fell 6% over a year ago.

The company's online sales, or Gap Inc. Direct sales, increased 5% to $298 million over a year earlier.

Operating expenses for the third quarter increased to $1.02 billion from $984 million in the prior year quarter, due largely to investments in fall marketing at Gap and Old Navy stores.

In a separate development, Gap said that its board has authorized a new $500 million share repurchase program, effective immediately.

In connection with the share repurchase authorization, Gap said it has entered into agreements with individual Fisher family members to repurchase shares. The company expects that about $20 million or about 4% of the $500 million share repurchase program will be purchased from these Fisher family members.

During the third quarter, the company repurchased about 4.1 million shares for $91 million. About 0.6 million of the total 4.1 million shares were repurchased from individual members of the Fisher family as part of previously announced purchase agreements with them.

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