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By
Reuters
Published
Nov 21, 2008
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Gap Q3 net profit rises, stands by 2008 view

By
Reuters
Published
Nov 21, 2008

* Q3 EPS 35 cents vs Street 34 cents

* Q3 net profit up 3 percent

* Q3 revenue $3.56 billion vs Street $3.55 billion

* 2008 outlook reaffirmed

* Shares unchanged after closing down 6 percent at $9.51

By Alexandria Sage

SAN FRANCISCO (Reuters) - Gap Inc posted higher quarterly net profit on Thursday, topping Wall Street expectations, helped by lower inventory and cost cutting that boosted margins and offset a decline in sales.


The global apparel retailer, which operates the Gap, Old Navy and Banana Republic chains as well as online shoe seller Pipeline, also stood by its full-year earnings forecast.

Gap shares were unchanged after-hours. They had closed down nearly 6 percent at $9.51 in a broad stock market sell-off.

"There's no question the fourth quarter is going to be challenging," Chief Executive Glenn Murphy said on a conference call, adding that shoppers were beginning to notice product improvements at Gap and Old Navy.

Susquehanna Financial analyst Thomas Filandro called Gap's third-quarter results "impressive, given the environment and their same-store sales results."

"They've done an amazing job of navigating the environment and preserving capital, focusing on growing those gross margins, keeping the balance of a healthy business as they right-size the brands," Filandro said.

For the third quarter ended Nov. 1, net income rose 3 percent to $246 million, or 35 cents per share, from $238 million, or 30 cents per share, a year earlier.

Sales fell nearly 8 percent to $3.56 billion from $3.85 billion, the San Francisco-based company said.

Analysts, on average, had expected earnings of 34 cents on sales of $3.55 billion, according to Reuters Estimates. The company predicted earnings of 33 cents to 35 cents per share.

Gap has been trying to dig itself out of a multiyear sales slump by improving its products and fine-tuning its image and target customers for its brands.

But like most U.S. retailers, Gap has been hurt as shoppers cut back on all but the most vital purchases such as food and gasoline in the economic downturn.

Also on Thursday, women's apparel chain New York & Co Inc swung to a quarterly loss on falling sales, teen retailer Wet Seal Inc TSAI.O forecast a disappointing fourth quarter while posting a third-quarter profit from a year-ago loss, and men's apparel maker Perry Ellis posted a lower profit, citing a weak retail environment.

"MORE COMPETITIVE"

At Gap, international sales, which represent about a tenth of total revenue, rose 9 percent in the quarter, but sales fell at North American Gap, Old Navy and Banana Republic stores. Gap's online division saw a 15 percent rise in sales.

Same-store sales, at outlets open for at least a year -- a key gauge of financial health -- fell 12 percent in the quarter.

Lower corporate overhead and store costs such as packaging, payroll and supplies helped reduce expenses, Gap said.

"As sales fall we make an effort to ensure that store related expenses ... stay in line as a percent of sales," said Chief Financial Officer Sabin Simmons.

Operating margins improved to 11.1 percent of sales from 9.5 percent a year earlier, helped by a 13 percent reduction in inventory, and Gap said it still expects an operating margin of about 10 percent for fiscal 2008.

Looking ahead, Gap said it still backs its fiscal 2008 earnings forecast of $1.30 to $1.35 per share.

"As we look at the fourth quarter, we are definitely more competitive than we were last year," Murphy said. "More competitive in terms of the product being right on for our target consumer, more competitive when it comes to the definition of value by brand."

Gap said inventory at the end of the fourth, holiday quarter would be down in the high single digits on a percentage basis.

Gap's stock is valued at 7.5 times estimated fiscal 2009 earnings, in line with the Dow Jones U.S. Apparel Retail Index .DUST, but at a premium to specialty retailer Limited Brands Inc LTR.N and department store Macy's Inc .

(Reporting by Alexandria Sage; editing by Jeffrey Benkoe, Leslie Gevirtz, Richard Chang)

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