Gap earnings drop 8.3% but beat estimates

Clothing chain Gap GPS reported an 8.3% decline in fourth-quarter profit Thursday, but the results beat Wall Street's forecasts because of the company's focus on controlling expenses, including inventory.

The San Francisco-based retailer said it earned $243 million, or 34 cents a share, for the three months ended Jan. 31. That compared with $265 million, or 35 cents a share, in the year-ago period.

Sales for the quarter fell almost 13% to $4.08 billion from the year-ago's $4.67 billion.

Analysts surveyed by Thomson Reuters had expected the company to earn 32 cents a share on revenue of $4.11 billion.

Like many apparel retailers, Gap is struggling with sluggish sales across all its divisions — Old Navy, Banana Republic and its namesake stores — as consumer sharply cut back on more discretionary items like fashion in the deepening recession.

Same-store sales, or sales at stores opened at least a year, dropped 14% for the quarter. They dropped 13% at Gap North America stores, 15% at Banana Republic North America and 17% at Old Navy. Its international business saw a 4% drop.

The company is focusing in particular on turning around its Old Navy division, which has dragged down the overall business. Last month, Gap named Mark Breitbard to the newly created role of chief merchandising and creative officer of Old Navy. It launched a new ad campaign for the lower-priced chain Thursday that includes a flier patterned like a celebrity magazine, a bevy of mock-models it is calling "Supermodelquins" and a renewed focus on its target market of young moms.

But Gap's intense attention to cost controls has helped the company boost its overall profit margins. Gap raised its fiscal 2008 earnings forecast earlier this month, crediting January cost-control efforts. The company said Thursday that inventory per square foot was down 6% at the end of the fourth quarter.

Gap expects the percentage drop in inventory per square foot on a year-over-year basis to be in the high single digits at the end of the first quarter. That compares with a 17% decline in the year-ago period.

"Our ability to drive healthy margins and achieve significant cost savings helped us deliver earnings growth of 16% over the course of a very challenging year," said Glenn Murphy, chairman and chief executive of Gap, in a statement.

He added that with nearly $2 billion in cash on hand and virtually no debt, the company has a "strong foundation that will allow our globally recognized brands to compete effectively this year as we navigate the current environment."

Gap said that it plans to open about 50 stores this year with about half located outside the U.S. and the remaining mostly in its outlet business. It expects that it will close about 100 stores, mainly in the Gap brand. Overall square footage is expected to decline 2% for the current fiscal year.

For the year ended Jan. 31, Gap earned $967 million, or $1.34 a share, compared with $833 million, or $1.05 a share in the year-ago period. Sales fell to $14.53 billion from $15.76 billion in the year-ago period.

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