Gap Chasm Narrows Slightly in Q1

NEW YORK – Gap Inc. said late Thursday that its first quarter earnings fell 26.4%, but managed to exceed consensus estimates.

Additionally, the San Francisco-based apparel specialty retailer, the largest in the US, could take some consolation in the fact that, while all four of its principal divisions finished with declines in same-store sales, the falloff was smaller than it had been in the year-ago quarter.

For the three months ended May 5, net income was $178 million, or $0.22 a diluted share, below the $242 million, or $0.28, registered last year. Excluding the $0.03 a share loss incurred due to the closure of the fledgling Forth & Towne division, adjusted EPS was $0.25, $0.01 higher than the consensus estimate of $0.24.

As reported earlier this month, net sales gained 3.4% to finish the quarter at $3.56 billion from $3.44 billion in last year’s quarter. Comparable-store sales were down 4% as Banana Republic North America comped downward 2%, International fell 3%, Gap North American declined 4% and Old Navy North America dipped 5%. In the year-ago quarter, Banana Republic North America was off 5%, Gap North America down 8% and Old Navy North America and International down 11%.

“We are actively working to fix our core business, retain and recruit talent, and streamline operations so that our organization can be more nimble and efficient,” commented Bob Fisher, interim president and chief executive officer of the company. “We took important steps in the first quarter by strengthening leadership teams and refining strategies at Gap and Old Navy.

“While we are making progress, there is more work to be done,” he added.

Among the strategies discussed was a focus on consumers in their late 20s within Gap brand stores and in its marketing.

Inventory per square foot dropped 8% during the quarter, and the company expects a low-single digit dip in this metric during the second and third quarters as well.

However, gross margin dropped to 38.1% of sales in the quarter from 40.2% in the comparable 2006, a decline attributed to higher markdowns at Gap brand.

On Wednesday, the company said that it had obtained the services of designer Patrick Robinson to head design at Gap Adult and Gapbody. He reports to Marka Hansen, president of Gap North America, and Gary Muto, president of Gap Adult and Gapbody. At the start of the quarter, Hansen and Muto were presidents of Banana Republic and Forth & Towne, respectively. Forth & Towne is being closed after an 18-month launch, and Gap’s operating results release Thursday said that one of the units has been shuttered with 18 more awaiting closure.

Gap ended the quarter with 3131 stores in operation versus 3053 a year ago.

The company didn’t veer away from its full year earnings guidance of $0.76 to $0.86 a diluted share, including losses for the Forth & Towne shutdown.