Friday, May 25, 2007

Profit slides as Gap reinvents itself (San Francisco Cronicle)

S.F. retail chain sees same-store sales decline, reveals new strategies for two largest brands

Pia Sarkar, Chronicle Staff Writer

Gap Inc.'s profit slid 26 percent in its fiscal first quarter as the company struggled to define itself to customers who have lost interest in its products.

The San Francisco retailer reported a profit of $178 million in the first quarter (22 cents per share), down from $242 million (28 cents) in the same period last year. The numbers include a $45 million loss from the planned closure of Forth & Towne, a brand created for women 35 and older that flopped after just 18 months.

Excluding Forth & Towne costs, Gap would have earned 25 cents per share -- a penny above the average estimate among analysts surveyed by Thomson Financial.

Revenue grew to $3.56 billion in the first quarter, a 3 percent increase from $3.44 billion last year. But same-store sales -- sales at stores open at least a year, considered an accurate barometer of a company's health -- fell by 4 percent, after a 9 percent decrease in the same period a year ago.

Same-store sales at the namesake Gap brand dropped by 4 percent, after an 8 percent decline last year. Same-store sales at Old Navy dropped by 5 percent, compared with an 11 percent decline last year. And same-store sales at Banana Republic, which up until recently had been posting gains, fell by 2 percent, after a 5 percent decline last year.

Online sales continued to be the bright spot for the company, growing to $195 million in the first quarter, compared with $159 million the year before.

Bob Fisher, interim chief executive officer for the company founded by his parents, said Gap is sticking to plans set out earlier this year calling for a simplified hierarchy among management as well as a focus on lowering expenses. It is in the middle of a search for a permanent CEO.

"There's more work to be done, but I feel good about the progress we're making," Fisher said during a conference call on Thursday.

As he has in the past, Fisher acknowledged that the Gap brand -- the company's oldest and second-largest division behind Old Navy -- has had a hard time defining itself to customers. It has been aiming at a broad range of people 18 to 34 years old. On Thursday, Fisher said the brand will stop chasing 18-to-23 year olds, a demographic that is aggressively courted by competitors. Instead, Gap will focus on 24-to-34 year olds, reducing its merchandise selection by 30 percent.

Old Navy president Dawn Robertson, who has held the position for six months, outlined for the first time strategies for the brand, which include getting merchandise into stores much faster than in the past. She also said Old Navy will try to strike more of a balance between value and fashion with its offerings.

Both Old Navy and Gap stores at key locations will be extensively remodeled throughout the year -- something the company has fallen behind on, according to Gap's chief financial officer, Byron Pollitt.

Richard Jaffe, an analyst for Stifel Nicolaus, said that while Old Navy can benefit from a more-efficient sourcing structure to keep it competitive, its bigger problem is the merchandise, which also ails Gap.

"Fixing the product is more important," he said.

As for plans to narrow the Gap brand's audience, Jaffe questioned the logic. "It's not clear to me how fewer choices will make a difference," he said. "It's about better choices."

Gap stock closed at $18.20 at the end of trading Thursday, off 8 cents for the day, with 6,258,603 shares traded.

No comments: