Gap net up, stock down 6%
Sharply higher profit didn’t win Gap Inc. any respect from Wall Street on Wednesday, as investors disappointed by the retailer’s annual earnings projection whacked 6% off the price of its shares.
Gap’s earnings jumped 26% in the third quarter despite flat sales, the company said, because it reined in its inventory and slashed marketing costs. Net income was $238 million, or 30 cents a share, compared to $189 million, or 23 cents a share, in the comparable period last year. Analysts expected profit of 29 cents a share.
Revenue in the quarter ended Nov. 3 was essentially unchanged at about $3.9 billion. Sales at stores open a year or more, a key industry indicator, fell 5%.
Chief Executive Glenn Murphy, sporting one of the “crazy stripe” sweaters that Gap is pushing for the holidays, ticked off the company’s accomplishments during a conference call with analysts but also struck a cautious tone.
“We feel we’re well-positioned for the holiday season,” he said. “We’re also very clearly aware that this is going to be a tougher environment than we faced last year.”
Gap said full-year profit would be between 99 cents and $1.05 a share, up from at most 95 cents, excluding expenses associated with the closure of the Forth & Towne chain. Analysts surveyed by Thomson estimated $1.05. The stock closed at $18.96, down $1.24.
The San Francisco parent of nearly 3,200 Gap, Old Navy and Banana Republic stores has been struggling to woo back customers who have strayed to competitors. Analyst Christine Chen of Needham & Co. thinks the merchandise has improved at Gap and Old Navy, chains that have been fighting to recover market share. But shoppers have not been persuaded.
“The question is, how long is it going to take customers to figure it out?” she said.
Gap said it saved $75 million by cutting marketing expenses. Typically, retailers beef up their marketing budgets -- for things like television ads and splashy magazine displays -- as they gain confidence in their merchandise.
Toward that end, Gap recently hired celebrity designer Todd Oldham as Old Navy’s design creative director and named Patrick Robinson, formerly artistic director for Paco Rabanne, as design chief for its namesake brand.
“I’m personally excited because I’m big fans of both of them,” Chen said. “But they’re not going to see their influence on the product until next year.”
Meanwhile, the company is adjusting its tactics as it tries to please shoppers and investors. It has implemented a variety of cost-cutting measures, including laying off about 2,000 employees.
The namesake chain is concentrating on “classics redefined,” offering more products such as pants with clean lines, jeans and turtleneck tops. For the holidays, it reintroduced “crazy stripe” sweaters and scarves in bright colors similar to those that sold well for the retailer in 2002.
Old Navy, its largest chain, is sharpening its focus on the “20-something” customer “without giving up on the mom,” Murphy said. “We’re definitely committed to listening to the customer, hearing the feedback and making the necessary adjustments,” he said.
To pull more shoppers into stores on the frantic shopping day after Thanksgiving, 100 Gap Outlet stores and 70 Banana Republic outlet stores will open at midnight tonight. Also, for the first time, 90% of Old Navy stores will open at 5 a.m. on Friday, two hours earlier than last year.
