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Gap Gaining Steam With Solid Quarter

Apparel retailer sustains turnaround as profit jumps to 22cents from 6cents a share.

August 22, 2003|Jerry Hirsch | Times Staff Writer

Profit at Gap Inc. is no longer as tight as its hip-hugging pants.

The nation's largest apparel chain-store operator reported its fourth straight quarter of earnings growth Thursday, aided in gains from its core Gap brand and the discount Old Navy chain.

Second-quarter net income rose nearly fourfold to $209 million, or 22 cents a share, compared with $57 million, or 6 cents, in the same period a year earlier. The results beat Wall Street expectations by a penny a share, according to a survey by Thomson First Call.

Total revenue rose 13% to $3.7 billion from $3.3 billion. Same-store sales, an important measure of a retailer's health, rose 10%, in contrast to a 7% decline a year ago.

San Francisco-based Gap released its financial report after its shares rose 22 cents to close at $19.65 on the New York Stock Exchange, reaching a 52-week high. It shot above $21 in after-hours trading.

"With each quarter, our product assortments are stronger, our consumer messages are more targeted, our customer-service focus is sharper and our operations are more disciplined and efficient," Paul Pressler, Gap's chief executive, told investors and analysts during a conference call Thursday.

Yet even Pressler noted that quarterly comparisons are going to get a lot tougher during the second half of the year.

Until October 2002, for instance, Gap had logged 29 consecutive months of declining same-store sales, so any increase looked dramatic.

"They have picked much of the low-hanging fruit and, moving forward, the fruit is going to be harder to reach," said Robert Buchanan, an analyst with A.G. Edwards & Sons in St. Louis.

This year's second half also will give investors their first real opportunity to measure Pressler's effectiveness as he steers the company through the important back-to-school and holiday shopping seasons during which he will be fully in control.

The former Walt Disney Co. theme park chief took over Gap last September.

Meanwhile, Buchanan said, Gap must still complete an overhaul of "prehistoric" information technology systems that still rely on mainframe computers and archaic software.

More important, the retailer must better define the target audience of its core Gap stores in North America, he said.

"Gap cannot continue to cater to every age and every lifestyle," Buchanan said.

But for now all of the company's divisions were ticking, executives said.

Same-store sales at the company's domestic Gap branded stores rose 9% over the same period. At the Old Navy chain, same-store sales jumped 11%, and at the higher-end Banana Republic chain sales increased 5%. A year ago all three divisions were reporting quarterly declines that ranged from 1% to 13%.

The company was helped by greater foot traffic and better marketing.

"We more effectively matched our creative vision with the needs of our customers," Pressler said.

Pressler has already begun making notable changes, namely ramping up the company's advertising and marketing profile by hiring pop star Madonna and hip-hop performer Missy Elliott to promote Gap division's new fall line of corduroy pants, jackets and miniskirts.

Gap plans to increasingly rely on advertising and will increase its TV ad budget by about 15% to $350 million during the second half of the year.

The company also will launch its first Spanish-language television campaign later this year for its Old Navy division.

Pressler didn't offer an outlook for the remainder of the year except to say that Gap's new line of corduroy apparel has been selling well during the current back-to-school season. He also said he anticipated revenue growth during the second half of the year, but declined to elaborate.

Analysts said one factor in whether Gap can maintain the type of profit growth may depend on the company's willingness to close under-performing stores.

Gap operates 4,230 Gap, Old Navy and Banana Republic stores, more than three-quarters of them in the U.S.

A recent report from Morgan Stanley estimates that Gap should have 500 fewer stores in the U.S.

Gap Chief Financial Officer Byron Pollittt said that the company would open 30 to 40 new locations this year, while closing more than 150 others.

Pressler replaced longtime Gap chief Millard "Mickey" Drexler in September. Drexler now heads competitor J. Crew Group.

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