Gap Reports $34.2-Million Quarterly Loss

Gap Inc., the nation’s largest specialty clothing retailer, reported its second consecutive quarterly loss Tuesday, continuing a two-year slide marked by fashion missteps and deep markdowns.

In announcing its fiscal fourth-quarter results, the San Francisco-based parent of Gap, Old Navy and Banana Republic stores said it plans to sell $1 billion of convertible bonds to boost its flagging finances.

The company also reshuffled leadership in its largest division, Gap stores, splitting up the merchandising for men’s and women’s clothing.

Although the latest results were in line with Wall Street expectations, Gap’s chief executive, Millard “Mickey” Drexler, said 2001 was the company’s most difficult year.

Gap stores suffered as the company moved away from trademark basics, such as khaki pants and button-down shirts, and into a more fashion-focused mix. Old Navy slumped as it became focused on a younger customer, straying from the target family audience, executives said.

On a conference call with analysts, Drexler acknowledged the fumble, particularly at Gap stores, where he spoke of “horrible-looking graphic men’s T-shirts” and “strange, double-patch” pants.

“I wish I could tell you that our problems were over,” Drexler said. He added that the company has made progress. But the company also warned that sales were continuing to slide in February.

Through Monday, sales at stores open at least a year were down 17% this month compared with the same period last year, with same-store sales at Gap below the company’s plan and sales at the other two divisions slightly above internal estimates.

“There was some good news relative to the non-merchandise issues in that inventories are low, capital expenditures are down and store growth is lower than planned,” said Todd Slater, an analyst with Lazard Freres in New York. But the problem is, it doesn’t go far enough, he said. “It will be a much slower road to recovery than if the company were to more aggressively close stores and shake up its sourcing and merchandise organization.”

For its fiscal fourth quarter ended Feb. 2, Gap posted a loss of $34.2 million, or 4 cents a share. A year earlier, the company posted a profit of $278.1 million, or 31 cents.

Total sales for the quarter fell 11% to $4.1 billion. Companywide, sales at stores open at least a year, a key industry measure, fell 16%.

Fourth-quarter results include a $15-million charge related to subleasing losses at the company’s headquarters in California and the planned closures of distribution centers in Kentucky and Holland.

For the full fiscal year, Gap reported an $8-million loss, or 1 cent a share, with pretax charges of $131 million, on sales of $13.85 billion. In the previous fiscal year, earnings were $877 million, or $1 a share, on revenue of $13.67 billion.

Chief Financial Officer Heidi Kunz said the company does not expect to close more stores in 2002 than in 2001, when the company shuttered 92 locations.

In planning to issue as much as $1 billion in bonds, the Gap is seeking to strengthen its balance sheet. Recently, Moody’s and Standard & Poor’s cut Gap’s debt ratings to junk status. That boosted the company’s annual interest costs on $700 million of bonds it sold in November by $8.75 million.

Gap reported its results after U.S. markets closed. After rising 64 cents to $13.55 during the regular session on the New York Stock Exchange, Gap shares fell as low as $12.37 in after-hours trading.