Gap Posts Slump in Sales, Profit

Gap Inc., the nation’s largest specialty retailer, talked all about a gap Thursday -- in sales and earnings.

The San Francisco-based company posted another quarter of declines in profit and sales, with net income down 17% and sales down 5% as the company suffered a slump in customer traffic.

On a conference call with investors after the market closed, the company said prospects were unlikely to improve until the second half of the year.

But the good news, analysts said, is that Wall Street was primed by company guidance to expect the sagging numbers from Gap, which hasn’t had a quarterly sales gain since 2004. In addition to beating earnings estimates by a penny a share, which sent the stock up in after-hours trading, Gap has been able to convince some investors that the management team’s turnaround plans will begin taking hold, as promised, this fall.

Gap shares rose 11 cents to $17.92 in regular trading. The stock rose an additional 51 cents, or 2.8%, in the two hours after the company reported.

“Things are still not good; every metric year over year was down,” said Christine Chen, an analyst with Pacific Growth Equities in San Francisco, who owns shares in the company and rates the stock “neutral.”

“I’m cautiously optimistic,” she said. “When retailers have a major strategic shortfall, it usually takes two years to turn around the business, and Gap is coming up on that two-year anniversary by the end of the second half.”

Despite the fiscal first-quarter problems, Gap said it was maintaining its earnings outlook for the year of $1.23 to $1.27 a share.

For the quarter ended April 29, Gap reported earnings of $242 million, or 28 cents a share, down from $291 million, or 31 cents, a year earlier.

Sales fell to $3.44 billion from $3.63 billion.

Sales in stores open at least a year plummeted in each of Gap’s divisions -- Banana Republic, Old Navy and Gap stores -- for a total company decline of 11%.

That drop-off excludes the company’s newest concept, Forth & Towne, focused on women 35 and older. Gap opened five of the stores in Chicago and New York last year and plans to open 10 this fall in Northern and Southern California, Seattle, Houston and Atlanta.

In the last couple of years, Gap has bounced back and forth between offering merchandise that turned out to be too trendy or too staid. But for fall, company executives told investors, Gap believes it has the right mix.

In addition to stocking updated styles, said Cynthia Harriss, president of the Gap chain, the company is moving forward with a new look, remodeling stores with a warmer environment, including larger dressing rooms, a denim “bar” and dark wood.

And after pulling its famous TV advertising last holiday season -- a sign to some that the company was worried about its fashions -- Gap said it intended to get the word out for fall.

“We are going to invest in the second quarter to help ensure that we are telling the consumer why we believe in what we’re doing,” Chief Executive Paul Pressler said on the conference call. “We believe in our product, we believe in our strategies, and we are going to fight every single day ... to make sure that we win back those customers’ confidence.”

Not all the analysts were convinced.

“With Gap it comes down to product,” Oregon-based independent analyst Jennifer Black wrote in a note to clients, “and until we see product improvements we are unable to become more enthusiastic.”