Gap 4th-Quarter Earnings Exceed Expectations

Gap Inc. reported better than expected fourth-quarter profit Tuesday and provided earnings guidance for fiscal 2005 that exceeded analysts expectations, giving its shares a lift in after-hours trading.

The San Francisco-based parent of nearly 3,000 Gap, Old Navy and Banana Republic stores projected a full-year profit of $1.41 to $1.45 a share; analysts were expecting $1.39.

The company’s shares hit $22.27 after hours after gaining 11 cents, to $21.28, in regular New York Stock Exchange trading. The results were announced after the markets closed.

The nation’s largest specialty apparel seller has been working to strengthen and reinvigorate its business. Through the first quarter of the 2004 fiscal year, Gap had posted seven consecutive quarters of profit growth. But earnings sank 7.2% in the second quarter and were flat in the third.

Analysts say the company is still struggling to strike fashion chords that resonate with shoppers, but is improving its operations and balance sheet and is developing initiatives to fuel future growth.

Gap plans to launch a fourth brand in the second half of 2005 to target female baby boomers.

“I think that while they’re transitioning, they’re still growing the earnings power of the company, and I think that’s a very positive thing,” said Adrienne Tennant, an analyst with Wedbush Morgan Securities.

Two more signs of that progress emerged Thursday: Gap said it was doubling its annual dividend, to 18 cents a share, and that it would buy $1.5 billion of its shares, having already purchased about 48 million shares for approximately $1 billion.

For the quarter ended Jan. 29, Gap said profit rose 4%, to $370 million, or 40 cents a share. Sales were $4.9 billion, unchanged from a year earlier. The results beat the 37 cents a share that analysts were looking for. In the same year-earlier period, Gap earned $356 million, or 37 cents a share.

Same-store sales, or sales at stores open at least a year -- a key measure of growth -- fell 3%.

The company said it might amend the results after reviewing its lease-related accounting -- a process occurring throughout the industry.

Gap’s balance sheet continues to improve. The company probably will have about a $500- million debt at the end of March, compared with approximately $3.4 billion at the end of 2002, Tennant said. In fiscal 2004, the company retired $871 million in debt.

Ratings firms have taken note.

Standard & Poor’s and Fitch Ratings recently raised Gap’s credit rating to investment grade from junk status. On Monday, Moody’s placed the retailer’s ratings on review for a possible upgrade, a process that generally takes about 90 days.

During a conference call with analysts, Chief Executive Paul Pressler said he was pleased with the company’s overall progress.

“We were disappointed in our fourth-quarter performance,” he said. “We understand the missed opportunities in each brand and I’m confident we’re making the necessary changes to improve.”

For the year, Gap posted a profit of $1.1 billion, or $1.20 a share, a 10% increase over the prior year’s $1 billion, or $1.09 a share.

A consensus of analysts polled by Thomson First Call expected annual earnings of $1.18 a share.

Sales for the year rose 3% to $16.3 billion.

Same-store sales were flat.