AP
Gap boosts 1Q profit on tight cost management
Thursday May 22, 6:18 pm ET
By Michael Liedtke, AP Business Writer
Gap boosts 1Q profit 40 pct on tight cost and inventory control despite persistent sales slump


SAN FRANCISCO (AP) -- Clothing retailer Gap Inc. boosted its first-quarter profit by 40 percent despite a persistent sales slump that seems likely to deepen this summer as consumers scrimp on fashion to help offset rising gasoline and food bills.

The San Francisco-based merchant said Thursday that it earned 249 million, or 34 cents per share, during the three months ended May 3. That compared with net income of $178 million, or 22 cents per share, at the same time last year.

Revenue for the period fell 5 percent to $3.38 billion.

The earnings beat the average estimate of 30 cents per share among analysts polled by Thomson Financial. The revenue missed analysts' target of $3.42 billion.

"We are pleased with our first-quarter performance in what undoubtedly was one of the most difficult retailing environments in recent memory," Gap Chairman Glenn Murphy said in a conference call with analysts.

Gap shares gained 22 cents to finish Thursday's regular session at $18.29, then added another 36 cents in after-hours trading.

In a telling sign of Gap's misery, sales at stores open for at least a year dropped 11 percent -- the company's worst erosion yet during a downturn that has lasted nearly four years.

Gap's so-called same-store sales have now declined in 15 consecutive quarters, by far the retailer's worst stretch of trouble since co-founders Donald and Doris Fisher opened the first store in 1969.

Since then, Gap has become a shopping center anchor with 3,177 stores worldwide. Besides the Gap, the company also owns the Old Navy and Banana Republic chains. Murphy indicated the company plans to end the year with 3,000 stores as management weeds out its biggest trouble spots.

Except for a brief upturn in 2003, Gap has struggled through most of this decade to design clothes that inspire shopping sprees. To clear the store shelves, Gap frequently had to offer steep discounts that crimped its profits.

Since hiring Murphy as its chief executive last July, Gap has been able to avoid dramatic markdowns by managing its clothing inventory better. The more disciplined approach -- combined with lower advertising expenses, layoffs and other cost cutting -- has helped increase Gap's profits for four consecutive quarters.

But the company's fashion tastes still aren't inspiring consumers to open their wallets -- a challenge that has become more daunting as more households cut corners to put gasoline in the car tank and food in the cupboard.

"We see no signs of improvement in the psyche of the American consumer," Murphy said.

Gap still believes it will be able to deliver the full-year earnings of $1.20 to $1.27 per share that it projected in February.

The financial pressures facing consumers have helped spur more sales at bargain-peddling merchants like Costco Wholesale Corp. and Wal-Mart Stores Inc., but Gap's discount brand -- Old Navy -- isn't enjoying similar success. Old Navy's same-store sales plunged 18 percent in the first quarter.

Murphy said Old Navy will try to rebound by trying to cater to budget-conscious women looking for clothing for themselves and their family.