Gap’s Profit Drops 7.2% as Sales Slow

Maybe they hit the beach. Or took a cruise. Perhaps they just stayed home.

Wherever shoppers flocked this summer, it wasn’t very often to Gap Inc.’s stores. Thursday, the San Francisco-based firm blamed a 7.2% drop in fiscal second-quarter profit on slow store traffic and a one-time charge .

Gap, which owns the Banana Republic and Old Navy chains in addition to its Gap stores, earned $194 million, or 21 cents a share, in the quarter ended July 31, compared with $209 million, or 22 cents, a year earlier.

The earnings matched analysts’ average predictions. Without a charge for early debt retirement, earnings would have been $234 million, or 25 cents a share.

During the quarter, sales rose 1% to $3.72 billion, compared with $3.69 billion a year earlier. Sales at stores open at least a year, a key indicator of a retailer’s health, were flat. Comparable sales increased 2%, at Gap stores in the U.S., compared with 9% a year earlier, and climbed 4% at Banana Republic, versus 5% last year. Old Navy’s same-store sales were flat after rising 11% in the 2003 quarter. Comparable sales at Gap’s non-U.S. stores, however, sank 10% after a 13% gain in the same period last year.

Chief Executive Paul Pressler cited double-digit earnings growth before the debt-retirement charge but called June and July’s results “disappointing”

The company made some mistakes, such as mailing summer circulars too close together, he said. “We are building these lessons learned into our strategies moving forward,” he said in a conference call with analysts and investors.

One strategy includes a new companywide credit card that is set to be unveiled this fall.

“We see a significant opportunity to drive sales,” Pressler said.

Adrienne Tennant, an analyst at Wedbush Morgan Securities, said the cards could be a good way to build customer loyalty and to “leverage the brand equity in each of the distinct brands.”

In fiscal 2004, about 125 new stores will be added to Gap’s 3,000 shops, the company said, and about 150 will be shuttered -- 15 more than planned. The closures will be weighted toward U.S. Gap stores.

The company recently launched a much-hyped fall ad campaign featuring actress Sarah Jessica Parker, who became a trendsetter after starring in HBO’s “Sex and the City.” Analysts say it’s too early to tell whether the ads, which clothe a couture-loving Parker in Gap basics, will boost sales.

“To have her endorse Gap is an interesting association,” said Christy Glass Lowe, a managing director at USBX Advisory Services, an investment bank. “It is a coup for them, but does it transfer to their customers?”

There’s also concern that the coordinating television spots don’t begin until Aug. 29, about a month later than last year’s ads, Tennant said in a research note.

The timing “essentially misses some of the critical tax-free holidays that should benefit back-to-school retailers,” wrote Tennant, who rated the stock a “hold.”

The earnings were released after the markets closed. Gap’s stock slid 71 cents to $20.15 on the New York Stock Exchange.