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Gap Issues Earnings Warning for Year

The clothing retailer's profit drops 20% and it is not optimistic about holiday sales.

November 18, 2005|Leslie Earnest | Times Staff Writer

Gap Inc. said Thursday that its third-quarter profit fell 20%, and warned that full-year earnings would be lower than expected because of disappointing early sales of holiday merchandise.

The news, released after the markets closed, sent shares of the clothing retailer down as much as 9% in after-hours trading.

"Our third-quarter performance was unacceptable," Chief Executive Paul Pressler told analysts during a conference call. "Overall, we must improve our product offering."

The San Francisco-based parent of more than 3,100 Gap, Old Navy and Banana Republic stores said traffic levels continued to deteriorate in all divisions in the first couple weeks of November, boding ill for the important holiday shopping season.

As a result, the company lowered its profit projection for the fiscal year ending Jan. 31 to $1.12 to $1.17 a share, from $1.30 to $1.34. Analysts polled by Thomson Financial on average expected earnings of $1.25 a share for the year.

Investors probably were surprised at "the magnitude" of the lowered projection, said Christine Chen, an analyst with Pacific Growth Equities.

Gap has not posted an increase in same-store sales for a year, which has prompted some analysts to wonder whether Pressler's days might be numbered.

Gap spokeswoman Stacy MacLean said Thursday that the company had "full confidence" in Pressler and had no plans to replace him. It also has "confidence in the strategic direction of the company," she said.

Gap said it hoped to attract customers to its stores this holiday season with "magalogs"--combination of a magazine and catalog -- that it has been mailing to customers highlighting its holiday offerings.

It also is moving to shorten the amount of time it takes to get some types of merchandise into stores so it can more rapidly replenish products that are selling briskly and stay on top of trends.

But it will take time to reverse course, said Cynthia Harriss, president of the Gap division.

"We have disappointed our customers for several seasons and we know it will take us time to win them back," she said.

For the quarter ended Oct. 29, Gap's profit fell to $212 million, or 24 cents a share, from $265 million, or 28 cents a share, for the same period a year earlier. This was in line with expectations. Revenue slipped 2.5% to $3.9 billion. Sales at stores open at least a year, a key industry indicator, dropped 7%.

Shares of Gap fell as low as $16.85 in after-hours trading Thursday. They rose 35 cents to $18.51 during the regular session.

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