Gap profit up slightly, beating estimates by a penny

NEW YORK -- Gap Inc. GPS reported that second-quarter earnings rose slightly from a year earlier, slightly beating Wall Street expectations despite a 7% decline in sales, as the apparel chain cut costs.

The San Francisco-based operator of Old Navy, Banana Republic and its namesake stores said Thursday that it earned $228 million, or 33 cents a share, in the quarter ended Aug. 1.

That compares with $229 million, or 32 cents a share, in the year-ago period. Sales fell to $3.25 billion from $3.50 billion in the year-ago period. Analysts surveyed by Thomson Reuters were projecting 32 cents a share on revenue of $3.23 billion.

Gap's sales at stores open at least a year fell 8%, dragged down by double-digit sales declines at the North America divisions of Gap and Banana Republic. That measurement, considered a key indicator of a retailer's health, is important because it excludes the effects of store expansion.

Like many apparel chains, Gap has suffered from shoppers' focus on necessities and away from nonessentials like trendy jeans. But the merchant has been in a better position than some rivals during the recession because it started slimming its inventory beforehand as part of its turnaround effort, which has otherwise stalled because of the sudden retreat of consumers.

The company has pressed for even more cuts in recent months, trimming the number of stores and shrinking their size. It said Thursday that inventory was down 14% by the end of the quarter from the year-ago period.

Gap has also been focusing on new merchandising and marketing initiatives to bring back customers. It's using its lower-price Old Navy chain, which was retooled last year to again cater to frugal moms after an ill-fated foray into trendier fashions, as a vehicle for growth in the recession.

So far, its merchandise efforts are gaining traction, but company officials have said more work needs to be done to improve Old Navy sales. To drive customers to Gap stores, the company is counting on an aggressive relaunch of its denim collection that began this month, overhauling how the clothes fit and marketing them heavily in stores.

Gap has also made some tweaks to the merchandise at Banana Republic, where sales dropped as higher-income shoppers cut back during the recession.

Same-store sales at Gap's North American stores were down 10%, while Banana Republic's same-store sales fell 15%.

Old Navy's same-store sales slipped 4%, compared with a 16% drop in the year ago period. The company's international division's same-store sales fell 5%.