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Against Odds, Gap's Earnings Soar

Despite sluggish customer traffic, the retailer posts net income of $202 million in its third consecutive quarter of growth.

May 23, 2003|Leslie Earnest | Times Staff Writer

Despite war, uninspired shoppers and uncooperative weather, Gap Inc.'s profit increased fivefold in its fiscal first quarter as the retailer continued to work to reverse its fortunes.

The San Francisco-based parent of more than 4,200 Gap, Old Navy and Banana Republic stores said Thursday that net income was $202 million, or 22 cents a share, compared with $37 million, or 4 cents, a year earlier.

It was the third consecutive quarter of earnings growth for the nation's largest specialty apparel retailer, which began showing comparable-store sales growth seven months ago after more than two years of sagging revenue.

"I think the turnaround is in play," said Adrienne Tennant, an analyst with Wedbush Morgan Securities. "They're laying the foundation."

He added that when U.S. consumers start spending with gusto again, Gap will "be able to capitalize on that."

But that may not happen anytime soon, said Robert Buchanan, an analyst with A.G. Edwards & Sons.

"Gap and other specialty retailers are going to have to continue to punch the competition in the nose and take their market share in what I think will remain a tough selling environment," he said.

The promising results in the quarter ended May 3 were linked, in part, to better sales of full-priced merchandise and ad campaigns that lured bargain-hungry shoppers to the family-oriented Old Navy chain.

Sales jumped 16% to $3.4 billion, compared with $2.9 billion a year earlier. Sales at stores open at least a year rose 12%, contrasted with a drop of 17% in the same quarter the year before.

Old Navy, which has been driving the comeback, again posted the strongest results, with same-store sales jumping 16%. Same-store sales rose 12% at the Gap chain's U.S. stores and 1% at Banana Republic.

But analysts caution that the sales results looked good in large part because they were being compared with last year's dismal numbers. More telling will be Gap's results in the second half of the year, when year-over-year comparisons get tougher and the merchandise will reflect changes made since former Walt Disney Co. executive Paul Pressler took over as chief executive.

And there's still work to do on the Gap division, which operates almost 3,000 stores, analysts say.

"What I haven't heard as yet is a clear definition of who the target customer is at the flagship," Buchanan said. "That's what we need to hear and what his organization needs to understand."

Gary Muto, president of the Gap chain, told analysts in a conference call that Gap had hired two new designers and continued to refine its merchandise.

The division also continues to conduct research in an effort to better understand its customer and is working to shrink the chain's lead times.

"The goal is to become much more competitive," Muto said.

Gap's stronger numbers weren't created by an onslaught of customers. Same-store traffic declined in each month of the quarter at Gap and Banana Republic stores. At Old Navy, traffic declined in February and March and rose 2% last month.

Even with the sluggish traffic, the stores have managed to get shoppers to buy, said spokeswoman Stacy MacLean, adding that all three brands were seeing upticks in the amounts customers are spending.

Gap shares rose 55 cents to $17.20 on the New York Stock Exchange. The earnings were released after the market closed.

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