Gap Profit Jumps 19 Percent

SAN FRANCISCO (Aug. 23) - Aggressive cost cutting and restructuring helped Gap Inc. post a second-quarter profit that surged 19 percent, allowing the struggling clothing retailer to match Wall Street's tepid expectations.

Gap reported profit for the quarter ended Aug. 4 of $152 million, or 19 cents per share, compared with $128 million, or 15 cents per share, in the year-ago period.

Second-quarter revenue declined 1 percent to $3.69 billion. Comparable-store sales - a key gauge of a merchant's health - crumbled 5 percent, though online sales surged 26 percent and the company increased its profit forecast for the year and expanded its stock-repurchase program.

Analysts surveyed by Thomson Financial expected the San Francisco-based retailer, which operates more than 3,100 stores in the U.S., Canada, Europe and Japan, to earn $135.9 million, or 19 cents per share, on revenue of $3.72 billion.

Gap stock closed down 8 cents Thursday at $17.40. After the company announced earnings, the stock gained 40 cents in after-hours trading.

Second-quarter results come less than two months after the appointment of Glenn Murphy as chairman and chief executive. Murphy, who previously served years as chairman and CEO of Canadian drug chain Shoppers Drug Mart, replaced Paul Pressler, a former Walt Disney Co. executive who ended his nearly 4 1/2-year stint at Gap after a miserable holiday shopping season.

"We have a lot of work ahead of us," said Murphy, who has met thousands of employees and toured 50 stores nationwide in the past month. "But we have great brands with enormous potential, and I feel confident that our creative talent and dedicated store employees will help fuel our progress."

Chief Financial Officer Byron H. Pollitt Jr. acknowledged in a conference call Thursday that customer response to summer merchandise was "mixed" and said the company was "still in turnaround." He sounded cautious about the U.S. economy, where consumers have racked up record debt and real estate prices have in many areas stagnated or declined.

"We feel we have more control over the cost side," Pollitt said.

But thanks to $100 million in savings from job cuts and other savings, Pollitt raised the company's forecast for 2007. Gap expects to earn 83 cents to 88 cents per year, up from its previous estimate of 76 cents to 86 cents per share.

Gap also announced an additional $1.5 billion stock buyback, part of a continuing share-repurchase program. The company repurchased 11 million shares worth $200 million in the second quarter, completing a $750 million buyback that began a year ago.

Gap, which ended the quarter with $2.7 billion in cash, has cut 1,600 workers so far this year. Executives haven't said how many of the company's 154,000 workers would be cut, but so far they've trimmed about 1 percent of payroll, within the range that industry analysts had anticipated.

In February, Gap announced it was shuttering its Forth & Towne stores, which targeted older women, so management could focus on attracting 20-somethings to the company's more established brands. Discontinuing Forth & Towne operations cost about $54 million in the first half and eliminated another 550 job cuts, though some employees were transferred to other Gap-owned chains. Gap also owns Old Navy and Banana Republic.

Gap is also scrutinizing real estate holdings.

In the first half, Gap opened 73 stores and closed 61 stores with disappointing performance, and by the end of the year it will have converted 45 Old Navy Outlets - aimed at budget shoppers - into slightly higher-end Old Navy stores.

Executives said the black sweater dress and a tailored white shirt will be mainstays of fall fashion at Gap stores, which will also feature women's jeans in an array of colors. So far this year, the company hasn't resorted to markdowns that were as aggressive as last year, Pollitt said.

The company, which hopes to emphasize weekend and casual clothing more than it had in the past, has refined its target customer - men and women from 24 to 34, with a "sweet spot" in the late 20s. Previously, the company targeted 18- to 34-year-olds, which executives said resulted in large, confusing arrays of merchandise.