Gap profit falls 26% on losses at failed business, markdowns

Clothing retailer Gap Inc. reported a 26% drop in fiscal first-quarter profit Thursday because of increased markdowns at Gap stores and losses at its failed Forth & Towne business.

The San Francisco-based operator of the Gap, Old Navy and Banana Republic chains reiterated its profit forecast for the year, indicating that the once-iconic retailer still did not expect a quick financial fix, and said its search for a new chief executive could take time.

Net income for the quarter ended May 5 was $178 million, or 22 cents a share, versus $242 million, or 28 cents, a year earlier. As reported earlier this month, sales rose 3.5% to $3.56 billion.

Excluding Forth & Towne losses, Gap earned 25 cents a share. On that basis, analysts on average had expected earnings of 24 cents a share, according to Reuters Estimates.

Gap itself had been expecting earnings per share to range from 23 cents to 25 cents, excluding Forth & Towne.

Gap, which operates more than 3,000 stores worldwide, is trying to revive sales and regain its former position as the icon of American casual fashion. The company has been looking for a chief executive since January, when former CEO Paul Pressler stepped down.

“We know this type of search can take time and it remains a top priority for the board,” interim CEO Robert Fisher said.

Meanwhile, the company has made a slew of management changes, including the appointment Wednesday of Patrick Robinson as design chief for its Gap brand. Robinson had been artistic director of fashion designer Paco Rabanne since 2005 and previously worked for Perry Ellis and Anne Klein.

Gap has said uninspiring fashions are behind its reporting of flat or falling same-store sales in every month but three since June 2004.

Same-store sales, which track sales at stores open at least a year, fell 4% in the first quarter compared with a 9% decline a year earlier.

On a conference call with analysts, Chief Financial Officer Byron Pollitt said the company’s Gap stores increased markdowns during the quarter to cut excess inventories. Those markdowns helped drive gross margins, a measure of profitability, down 2.1 points from the previous year.

“We expect Gap brand inventories to be back in line by fall,” Pollitt said.

Fisher has called 2007 a transition year and has promised no quick fixes for turning around the company.

Gap said it still expected to earn 76 cents to 86 cents a share this year. Excluding Forth & Towne’s losses, earnings are expected to be 80 cents to 90 cents a share.

Excluding one-time items, analysts are expecting earnings of 93 cents a share, according to Reuters Estimates.

Gap shares were up 1.2% at $18.50 in extended trading after closing at $18.29, down 8 cents.