Gap’s Profit Drops Off 51%

Gap Inc. said Thursday first-quarter profit fell 51% as it continued to struggle with sluggish consumer spending and waning same-store sales.

The No. 1 U.S. apparel chain said it has seen improvements over the last several months but still expects to resort to promotions and markdowns in the coming months to sell through its summer inventory. As a result, same-store sales are expected to fall.

“We’re making progress, but business is still challenging,” said Chief Executive Millard Drexler. “We are focused on offering customers the newness they expect when they shop our stores.”

The San Francisco-based retailer said net income fell to $115 million, or 13 cents a share, in the period ended May 5, from $235 million, or 27 cents, a year ago, on a 16% rise in sales to $3.2 billion.

The results were a penny better than the average forecast of analysts polled by First Call/Thomson Financial.

“While the positive reaction to summer product was promising in April, we do expect the second quarter to remain promotional and anticipate comps to be in the negative mid-single digit range,” said Chief Financial Officer Heidi Kunz, referring to comparable-store sales.

Kunz also said that Gap was working on pulling back the reins slightly on inventory across all brands and trim expenses to enter the second quarter with better leverage against the dismal U.S. economic environment.

In the first quarter, sales at stores open at least one year fell 7%, compared with a 2% decrease in the year-earlier period. Same-store sales were down at all Gap chains, which include Banana Republic and Old Navy.

The company said its first-quarter sales growth has averaged 23% during the last three years, while same-store sales increases have averaged 1% during the same period.

In the latest quarter, same-store sales at its Gap domestic stores fell in the mid-single digit range, while Banana Republic brand same-store sales fell in the high-single digits. Same-store sales at Old Navy stores fell in the high-single digit range, and Gap international sales fell in the high single-digits.

In March, analysts lowered their consensus estimates from 20 cents after Gap said its earnings would be between 10 and 15 cents. Earlier this month, however, Gap once again revised its outlook saying it expected to beat analysts’ lowered estimates with earnings of about 12 cents to 13 cents.

Shares of Gap closed up 75 cents at $34.90 on the New York Stock Exchange, before the results were released.