Gap Earnings Up 26% But Forecast Disappoints

Gap posted a 26 percent rise in quarterly earnings, but a raised forecast failed to match some Wall Street targets, disappointing investors.


The apparel retailer's shares fell some 5 percent Wednesday on the New York Stock Exchange.

Cost-cutting measures, restructuring and managed inventory helped boost profit at the apparel giant that has been battling slumping sales, but quarterly sales at stores open a year or more fell 5 percent.

"They raised their guidance for the year, but their high end is in line with consensus, and that's disappointing because it means there is potential downside," said Needham analyst Christine Chen.

The company, which operates over 3,100 stores around the globe, said third-quarter net income rose to $238 million, or 30 cents per share, from $189 million, or 23 cents per share, a year ago. Sales were flat at $3.85 billion.

Analysts, on average, had been expecting earnings of 29 cents on sales of $3.83 billion, according to Reuters Estimates, although it was not immediately clear if the figures were comparable.

Gap, which named its new chief executive, Glenn Murphy, in July, has been reducing inventories as it tries to revamp its product lines at its two main chains, Gap and Old Navy. It has shuttered its Forth & Towne stores and has cut jobs.

Earlier this month, the retailer raised its third-quarter earnings outlook to a range between 28 cents to 30 cents per share.

Wall Street believes that Gap may finally be beginning to emerge from a years-long sales slump due to unfocused merchandise and competition from a host of rivals.

Although same-store sales, a key gauge of retail performance, fell 5 percent in the quarter, analysts have lauded Gap's attempts to improve its merchandise selection and say it will take time for traffic to come back.

The company increased its full-year net earnings outlook to a range of 92 cents to 98 cents from an earlier view of 83 cents to 88 cents. On an adjusted basis, it expects earnings between 99 cents and $1.05 from an earlier view of 90 cents to 95 cents. Analysts, on average, had been expecting full-year adjusted earnings of $1.05, Chen said.

Gross margins in the quarter rose by 0.1 point from a year earlier, while operating margins rose by 2.2 points.

Shares of San Francisco-based Gap trade at 17 times projected 2008 earnings, above retailer Limited Brands and the Dow Jones Retail Index at 10 and 15 times forward-looking expected earnings, respectively.