Gap Down in Q3, Trims Q4 Outlook

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NEW YORK – Gap Inc.’s profits continued to suffer due to anemic sales, with Old Navy cited as the principal culprit for both a weaker third quarter and expected softness in the year’s final period.

Gap announced late Thursday that net income for the three months ended Oct. 28 fell 10.9% to $189 million, or 23 cents a diluted share, from $212 million, or 24 cents, in the 2005 period. Gap did manage to beat the analysts’ consensus estimate by 1 cent.

Sales were flat, at $3.86 billion, and were down 7% on a same-store basis. Banana Republic North America was the only unit with a comparable-store sales increase, 3%, while the North American segments of Gap and Old Navy both fell 7% in the quarter and international comps dropped 6%.

“Our third quarter results reflect that each brand is at a different stage in its turnaround,” said Paul Pressler, president and chief executive officer, in a statement. “We are pleased with the solid performance at Banana Republic and continued progress each month of the quarter at Gap brand. However, Old Navy’s results were disappointing.”

The firm also lowered its full-year fiscal guidance to earnings per share of $1.01 to $1.06 from its previous range of $1.08 to $1.12 based on Old Navy’s continuing malaise, “which has continued into November, and coupled with a slower turnaround pace at Gap brand.”

The revised projection assumed fourth-quarter EPS of 35 to 40 cents a share. However, Goldman Sachs analyst Margaret Mager, writing in a research note prior to the release of the figures, pulled her fourth-quarter estimate for Gap down to 34 cents. She maintained her “sell” rating on the stock.

“Gap continues to face fundamental structural challenges that stem in large part from its size and positioning,” Mager wrote. “The company is being squeezed by smaller and more nimble specialty competitors on the one hand, and lower-cost big box retailers selling high-quality basic fashion apparel on the other. We view these challenges as secular and do not expect them to dissipate.”

Furthermore, she called recent expressions of confidence by Gap officials about their merchandising to be “misplaced.”

For the nine months to date, the San Francisco-based retailer, the largest apparel specialty retailer in the U.S., net income fell 27.9% to $559 million, or 66 cents a diluted share, from $775 million, or 86 cents. Net sales declined 1.7% to $11.01 billion.

At the end of the quarter, Gap operated 1,338 Gap stores, 1,008 Old Navy units, 514 Banana Republics and 15 Forth & Towne shops in North America. It operates an additional 282 stores in Europe and Asia.

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