Sharply higher profit didn't win Gap Inc. any respect from Wall Street on Wednesday, as investors disappointed by the retailer's annual earnings projection whacked 6% off the price of its shares.
Gap's earnings jumped 26% in the third quarter despite flat sales, the company said, because it reined in its inventory and slashed marketing costs. Net income was $238 million, or 30 cents a share, compared to $189 million, or 23 cents a share, in the comparable period last year. Analysts expected profit of 29 cents a share.
Revenue in the quarter ended Nov. 3 was essentially unchanged at about $3.9 billion. Sales at stores open a year or more, a key industry indicator, fell 5%.
Chief Executive Glenn Murphy, sporting one of the "crazy stripe" sweaters that Gap is pushing for the holidays, ticked off the company's accomplishments during a conference call with analysts but also struck a cautious tone.
"We feel we're well-positioned for the holiday season," he said. "We're also very clearly aware that this is going to be a tougher environment than we faced last year."
Gap said full-year profit would be between 99 cents and $1.05 a share, up from at most 95 cents, excluding expenses associated with the closure of the Forth & Towne chain. Analysts surveyed by Thomson estimated $1.05. The stock closed at $18.96, down $1.24.
The San Francisco parent of nearly 3,200 Gap, Old Navy and Banana Republic stores has been struggling to woo back customers who have strayed to competitors. Analyst Christine Chen of Needham & Co. thinks the merchandise has improved at Gap and Old Navy, chains that have been fighting to recover market share. But shoppers have not been persuaded.
"The question is, how long is it going to take customers to figure it out?" she said.
Gap said it saved $75 million by cutting marketing expenses. Typically, retailers beef up their marketing budgets -- for things like television ads and splashy magazine displays -- as they gain confidence in their merchandise.
Toward that end, Gap recently hired celebrity designer Todd Oldham as Old Navy's design creative director and named Patrick Robinson, formerly artistic director for Paco Rabanne, as design chief for its namesake brand.
"I'm personally excited because I'm big fans of both of them," Chen said. "But they're not going to see their influence on the product until next year."
