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Gap Inc. Quintuples First-Quarter Profits

At Gap Inc., feeling groovy is more than an advertising message as the retailer said first-quarter income catapulted 452 percent to $202.5 million.

NEW YORK — At Gap Inc. these days, feeling groovy is more than an advertising message.

Continuing to make impressive strides in its turnaround efforts, the San Francisco-based specialty retailing giant boasted its third consecutive quarter of profit increases, this time a five-and-a-half-fold surge in its first quarter, reflecting strong customer response to its improved merchandise and marketing, particularly at the Gap and Old Navy chains.

For the three months ended May 3, Gap, the nation’s largest specialty apparel chain with 4,241 store concepts housed in 3,105 locations, said income catapulted 452 percent to $202.5 million, or 22 cents a diluted share, at the high end of its expectations and a penny ahead of Wall Street’s expectations. The firm reported income of $36.7 million, or 4 cents, in the corresponding period last year.

Benefiting from more items sold at regular price, sales for the quarter rose 16 percent to $3.35 billion over $2.89 billion and jumped 12 percent on a same-store sales basis compared with a decrease of 17 percent last year. All brands posted positive comps versus negative comps last year: Old Navy led the pack with a 16 percent boost, followed by Gap at 12 percent and the less robust Banana Republic, up 1 percent.

Coinciding with Gap’s trio of quarterly increases, president and chief executive Paul?Pressler presided over his third earnings conference call with Wall Street analysts by saying that stronger products and improvements in merchandise and markdown margins and regular price selling helped drive results. In addition, he said Gap’s focus on customer service helped to drive conversions. Marketing efforts at Gap, sponsors of the Feelin’ Groovy campaign for its GapStretch women’s pants, and Old Navy helped offset weak traffic patterns.

“We are still early in the turnaround process and the development of our long-term strategy, but we are clearly gaining traction and earning our way back to growth,” Pressler said.

Unlike the overwhelming majority of stores releasing results on Thursday, Gap issued theirs after the close of the market. Earlier in the day, investors demonstrated their renewed confidence in the retailer’s ability to continue its recovery by sending Gap shares up 55 cents, or 3.3 percent, to close at $17.20 in New York Stock Exchange trading. In the past year, shares have traded as high as $18.03, on May 8, and as low as $8.35, reached Oct. 4. The 52-week high corresponded with the firm’s better-than-expected 20 percent increase in April comps, the seventh straight month that its same-store sales have trended upward.

Byron?Pollitt,?chief financial officer, said he expects real estate square footage to decrease about 2 percent in 2003. Specifically, he said the company plans to open 30 to 40 locations, or 40 to 60 concepts, and close about 120 locations, or 150 concepts.

Results over the last several months have benefited from the company’s commitment to serve “Every Generation” by returning to classic, casual clothing. However, they’ve similarly looked strong in comparison with more than two years of falling comps and deep markdowns as it stocked its shelves with low-rise jeans and belly-bearing tops. Eventually, the string of lower comps would hit 29 consecutive months, and Gap would even lose money in the third and fourth quarters of 2001.

Summarizing the upswing in his statement, Pressler cited “strong product assortments with more brand-appropriate styles and color palettes, more effective marketing and improved service in our stores.”

Other specialty stores reporting results on Thursday:

THE WET SEAL

The Wet Seal reported a first-quarter loss, reversing a year-ago profit, as the contemporary specialty retailer failed in dramatic fashion to recycle the strong, full-priced selling it enjoyed with the bohemian trend last spring.

The Foothill Ranch, Calif.-based firm, parent of Wet Seal, Arden B. and Zutopia stores, said its losses amounted to $8.5 million, or 29 cents a diluted share, in line with its previously lowered earnings guidance and a penny ahead of Wall Street’s downwardly revised guidance. On March 20, WS said it expected a loss of between 21 and 27 cents. In the year-ago period, WS reported earnings of $8.7 million, or 28 cents.

Sales in the quarter dropped 21.1 percent to $123.6 million from $156.6 million, while same-store sales plummeted 25.5 percent, reflecting a drop in the number of transactions from a year ago, when it saw an 8.2 percent comp increase.

Wet Seal said it continued to work through some of the challenges in the first quarter and made progress in its efforts to refresh its product and reconnect with its customers. However, despite the month-to-month improvements in its comparable-store sales trends during the quarter, Irving Teitelbaum, chairman and interim chief executive officer, said in a statement he has been disappointed by lower sales in late April and early May.

The company said sales are expected to improve in the second half of the fiscal year, noting it’s working to ensure that merchandise reaches stores on a more consistent and timely basis.

“While sales have not rebounded as quickly or as strongly as we had initially expected, we are looking forward to better prospects for the second half of the year, particularly as we roll out the important back-to-school line,” Teitelbaum said. Teitelbaum took over ceo duties after Kathy Bronstein was relieved of her duties in February, on the same day that the firm reported that its January comps had fallen 25.1 percent.

While the firm was mute on sales and bottom-line goals for the current second quarter, it said it is expecting May comps to be somewhat weaker than the 16.9 percent decrease in April.

AEROPOSTALE

While promotional pressure may have hurt other retailers in the first quarter, it played into Aeropostale Inc.’s hands as major top-line growth allowed the company’s net income to more than triple.

For the three months ended May 3, the New York-based specialty teen retailer posted an eye-popping 256.8 percent jump in earnings to $2.1 million, or 5 cents a diluted share. By comparison, last year the firm recorded profits of $592,000, or 1 cent. Earnings per share eclipsed the Wall Street forecast by 3 cents. Excluding a noncash charge in the prior-year quarter, net earnings would have increased a more modest 119.1 percent from $964,000, or 2 cents.

Sales for the period swelled by almost a third, or 31.8 percent, to $112.2 million from $85.1 million a year ago, as same-store sales increased 1.8 percent versus 22 percent last year.

“We’ve always operated as a pre-planned promotional store,” said chief executive officer Julian Geiger on a conference call with analysts. “We think that this promotional posture gives us a real advantage in any economic environment. Despite a challenging environment for specialty retail and difficult comparisons in the year-ago period, we were able to generate strong comparable-store sales. Additionally, our new stores continued to perform above our model expectations.”

Greater efficiency also fueled earnings growth as evidenced by a 330 basis point reduction in selling, general and administrative expenses to 24 percent of sales from 27.3 percent a year ago.

Aeropostale affirmed its expansion plans, saying it remains on track to open at least 85 new stores over the course of the year, with 20 of those units in new markets.

In guidance, the company said it is now more bullish about the second quarter, as earnings per share are expected to break even. Previously, Aeropostale had forecast second-quarter results of break even to a 2-cent loss.

GOODY’S FAMILY CLOTHING

Only an $8 million pretax charge to cover damages awarded to Tommy Hilfiger Corp. kept Goody’s Family Clothing from beating its prior-year profit performance.

The Knoxville, Tenn.-based apparel retailer registered net income for the 13 weeks ended May 3 of $1.9 million, or 6 cents a diluted share, two-thirds below the $5.6 million, or 17 cents, reported in the year-ago quarter. Without the Hilfiger charge, first-quarter earnings would have registered $6.9 million or 21 cents.

Sales slipped 0.2 percent, to $283 million from $283.5 million, but comparable-store sales increased 0.9 percent, due to the elimination of underperforming stores.

Speaking of the Hilfiger case, Robert Goodfriend, chairman and chief executive, commented, “We are disappointed and surprised by the court’s decision and, based on a preliminary review of the decision, we believe we have strong grounds for appeal and are currently reviewing our options.”

As reported, a U.S. District Court earlier this month awarded Hilfiger an $11 million compensation in a case involving the sale of counterfeit T-shirts and private label jeans deemed to infringe on Hilfiger trademarks. Since then, Goody’s insurance carrier, Fireman’s Fund, has sought a court declaration that it isn’t obliged to indemnify Goody’s in the Hilfiger case. Goody’s contests that assertion and said it intends to pursue its claims “vigorously.”

In an interview, Goodfriend noted that the quarter’s results benefited from “advantageous buys from our strong business partners,” as well as from rigorous control of inventories which, at $207.2 million, were $2 million under plan and 2.8 percent above year-ago levels.

He cited plus sizes, especially in the junior and petite areas, as among the businesses that have grown based on input sought from consumers. “We thought we were in those businesses in a real way,” he said, “but our customers told us we really hadn’t been.”

The company operates 327 stores, five less than it did one year ago. Overall plans for the year call for 10 new stores, 14 relocations or remodelings and the closure of approximately five units.

GADZOOKS

Swooning same-store sales helped push Gadzooks Inc. to a loss in the first quarter, but the company said it remains on track with its conversion to an all-juniors concept.

For the three months ended May 3, the Dallas-based specialty retailer recorded a net loss of $4.1 million, or 45 cents a diluted share, versus last year’s profits of $1.8 million, or 19 cents. Earnings per share missed the Wall Street consensus estimate by 8 cents.

Sales for the period fell 9.6 percent to $70.7 million from $78.3 million a year ago, as same-store sales plunged 10.6 percent.

While earnings came in below Gadzooks’ expectations, the company said it remains optimistic about operations once its repositioning is completed.

“Financially and operationally, we are on plan to reconfigure our business to an all-juniors format,” said chief executive officer Jerry Szczepanski on a conference call with analysts. “The liquidation of our men’s merchandise is well under way, and we are steadily filling in with our new juniors offerings,” he added in a statement.

As reported, in January, Gadzooks said it would exit its men’s business and become an all-juniors chain by July.

Gadzooks also said for the month to date, May comparable-store sales are up 8 percent on the strength of juniors merchandise and the liquidation of men’s apparel. Gadzooks declined to elaborate specifically on the performance of juniors comps in May so far.

CLAIRE’S STORES

Claire’s Stores, a specialty retailer of costume jewelry and accessories, said quarterly earnings rose 88 percent on robust sales of its lower-priced products geared to teen and pre-teen girls.

The company, based in Pembroke Pines, Fla., also announced chairman and chief executive Rowland Schaefer will extend his leave of absence, which began in November 2002, for another six months, until this November.

For the three months ended May 3, earnings soared to $15.6 million, or 32 cents a diluted share, catapulting past its upwardly revised earnings forecast of 24 to 26 cents a share and consensus estimates of 26 cents. In the same period last year, earnings were $8.3 million, or 17 cents. Earlier this month, Claire’s raised its guidance from 21 cents based on the better-than-expected 15 percent increase in April comps.

Sales for the quarter progressed 14 percent to $239.8 million, compared with $210.4 million, and increased 8 percent on a comp basis.

Marla Schaefer, acting co-chairwoman and co-chief executive, said in a statement that the significant growth in earnings is attributable to “our intense focus on providing our customers with affordable merchandise they want, due to its newness and fashion relevance.”

In addition to reporting results which were ahead of estimates, Claire’s also raised earnings estimates for the second quarter to 40 cents a diluted share, compared with 31 cents last year. And for the year, it raised guidance to $1.95 from $1.76 per share, versus the $1.59 reported for 2002.

THE DRESS BARN

The Dress Barn Inc. on Thursday posted a 73 percent drop in its third-quarter earnings, even without the recent $30 million jury verdict against the firm.

For the three months ended April 26, income was $2.6 million, or 9 cents a diluted share, versus $9.5 million, or 25 cents, in the year-ago quarter. Sales fell 6.5 percent to $165.7 million from $177.1 million and were off 9 percent on a comparable-store basis.

Elliot Jaffe, chairman, said in a statement: “Our quarterly sales performance continued to be impacted by weak consumer confidence, and unseasonably cold weather. While inventories are above plan levels, the increase is in current season merchandise.”

The company noted that it has filed motions to set aside a verdict in favor of Alan M. Glazer and related parties, of which $30 million represented compensatory damages. The lawsuit, according to a regulatory filing, was filed in a Connecticut state court accusing Dress Barn of “unfair trade practices” in connection with negotiations to acquire the Bedford Fair catalog business before it filed for Chapter 11 several years ago. Bedford Fair was later acquired by Fingerhut Cos. Punitive damages have yet to be assessed by the trial court, Dress Barn said. The specialty retailer also said that by the time it releases fourth-quarter and fiscal yearend results on July 26, it will know and reflect in the financial reports the amount of the judgment entered, if any, by the court. The company said it will “vigorously pursue an appeal” if a judgment is entered.

For the nine months, earnings dropped 35 percent to $16 million, or 49 cents, from $24.5 million, or 66 cents. Sales dipped by 2.2 percent to $519 million from $530.4 million as comps receded 5 percent.

CASUAL MALE

Casual Male Retail Group Inc. posted wider first-quarter losses, impacted in part by an increase in interest expenses.

The loss for the three months ended May 3 was $2.8 million, or 8 cents a diluted share, versus $1.8 million, or 12 cents, a year ago. Excluding the loss from discontinued operations, the loss would have been $2.7 million, or 7 cents, compared with $1.4 million, or 10 cents, last year. Interest expense was $2.9 million versus just $354,000 last year. The loss from continuing operations before minority interest and income taxes widened slightly to $2.7 million from $2.5 million.

The company said in a statement that its plan to exit its Levi’s/Dockers business is “still progressing as planned and as leases expire or lease negotiations with landlords are reached, the company will continue to close its Levi’s/Dockers outlet stores.”

Total sales in the quarter skyrocketed 208.6 percent to $99.7 million from $32.3 million. The Casual Male business contributed $72.8 million of total sales, while the branded apparel business — Levi’s/Dockers and Ecko Unlimited outlet stores — accounted for $26.9 million. Selling, general and administrative expenses rose at a faster pace than did sales, quadrupling to $33.2 million from $8.1 million.

David Levin, president and chief executive officer, said in a statement that the company’s belief when it acquired the Casual Male business a year ago was that it had a strong and stable sales base, but its biggest problem was a “bloated corporate overhead and an infrastructure in disrepair.” The ceo, who acknowledged merchandising problems in the last two quarters, noted that the company has implemented initiatives to address them, as well as some management changes. “The initiatives to address these deficiencies should begin to impact sales trends in the second half of the year,” he said.

Dennis Hernreich, executive vice president and chief financial officer, said in a statement: “During our first year operating the Casual Male stores, we have been able to reduce costs by $20 million on an annualized basis. The next 12 months we will complete our system enhancements and expect to reach $25 million in annualized cost savings.”

Designs Inc. acquired Casual Male in a bankruptcy court auction in May 2002 and later changed its name to Casual Male.