Gap Passes Lower Q4 Guidance

NEW YORK – The largest apparel specialty store operator in the U.S. managed to beat repeatedly revised fourth-quarter expectations despite a 35% drop in earnings.

San Francisco-based Gap said that net income for the 14 weeks ended Feb. 3 was $219 million, or 27 cents a diluted share, above the upwardly revised guidance of 23 to 25 cents provided last month but markedly below the $337 million, or 39 cents, reported for the fourth quarter of 2005.

Before raising its estimates on Feb. 6, when it reported flat same-store sales in January, Gap had lowered them twice during the fourth quarter, first to a range of 35 to 40 cents in November and then to between 17 and 21 cents in January.

Quarterly sales rose 2.3%, to $4.93 billion from $4.82 billion, but were down 7% on a same-store basis after elimination of the effect of the extra week of selling in the most recent quarter.

By division, same-store sales were down 9% at Old Navy North America, down 8% at Gap North America, down 6% in the international unit and up 3% at Banana Republic North America. Net sales dropped at Gap North America, to $1.6 billion from $1.7 billion; were flat at Old Navy North America, at $2 billion for both periods; and rose at Banana Republic, to $808 million from $707 million, and International, to $496 million from $439 million.

Gross margin dropped during the quarter, to 32.5% of sales from $34% in the year-ago quarter.

Bob Fisher, interim president and chief executive officer, commented, “We were not satisfied with our 2006 results and are taking action. In 2007, we are focusing on three priorities: fixing our core business by creating the right product and outstanding store experiences; retaining and developing the best talent in the industry; and examining our organizational structure to ensure that we enable our brands to make decisions and effect change more efficiently.”

Paul Pressler lost his post as president and CEO of Gap on Jan. 23, and Marka Hansen moved from the presidency of the Banana Republic unit to the presidency of Gap North America on Feb. 1. On Thursday, the firm said it was in the “final stages” of selecting a search firm to find a new CEO.

Gap also said Thursday as it reported quarterly results that it’s converting 45 Old Navy Outlet stores into regular Old Navy units and should complete that conversion by October.

For the full year, net income dropped 30.1% to $778 million, or 93 cents a diluted share, from $1.11 billion, or $1.24, in fiscal 2005. Net sales dropped 0.5% to $15.94 billion from $16.02 billion and dropped 7% on a comparable-store basis, subtracting the effect of the extra week of selling in the more recent year.

Gross margin for the year was down 120 basis points to 35.4%, “driven primarily by markdown and promotional activity at Gap and Old Navy,” the company said.

Gap said earlier this week that it would close its fledgling 19-unit Forth & Towne division by the end of June and take a 4-cent charge to earnings in the first half to cover closures and related costs.

Including the 4-cent charge, Gap said it expects fiscal 2007 earnings per diluted share to come in at between 76 and 86 cents, below the 93 cents registered for fiscal 2006.

At the close of the quarter, Gap operated 3,131 stores occupying a total of about 38.9 million square feet of selling space.