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Gap’s Five-Step Growth Plan

NEW YORK — Gap Inc. outlined new strategies to boost its 2005 bottom line after reporting a 3.9 percent rise in fourth-quarter profits.<BR><BR>“We were disappointed with our fourth-quarter performance,’’ Paul Pressler,...

NEW YORK — Gap Inc. outlined new strategies to boost its 2005 bottom line after reporting a 3.9 percent rise in fourth-quarter profits.

“We were disappointed with our fourth-quarter performance,’’ Paul Pressler, president and chief executive officer of Gap, said during a conference call with analysts and investors. “We understand the missed opportunities in each brand, and I’m confident that we’re making the needed changes to improve.”

In the fourth quarter, successful post-holiday promotions at Banana Republic could not offset weak demand for performance fleece at Old Navy and off-the-mark fashions at Gap before Christmas. Still, the company’s earnings results released Thursday were better than Wall Street’s expectations in both the fourth quarter and the full year, and Gap guided full-year 2005 earnings ahead of analysts’ consensus estimates.

At Gap specifically, Pressler said: “We missed an opportunity to better balance the holiday assortment with more traditional gift-giving products such as updated classic sweaters.”

Pressler outlined a five-step approach to beef up the company’s financial performance, including:

This story first appeared in the February 25, 2005 issue of WWD.  Subscribe Today.

  • Providing trend-right and appropriate products in easy-to-shop environments.

  • Improving the supply chain to increase cost savings and operating efficiencies via consolidating vendors and “aggregating category buys.”
  • Expanding its efforts to get the right sizes in the right stores in Gap and Old Navy to improve margins.
  • Growing existing brands through two initiatives: the opening of 175 stores and the expansion of product initiatives. Most of the square-footage growth will be at Old Navy, with 75 new stores and more product extensions, such as maternity and plus sizes. In addition, maternity offerings will be increased to 70 Gap stores and petites will be offered at Banana Republic in 26 locations.
  • Returning excess cash to shareholders via dividends and share repurchases. For example, the company has doubled its first-quarter dividend to 18 cents and it announced Thursday a new $1.5 billion share-repurchase program.

Financial goals include generating $1 billion in free cash flow in 2005 and reducing debt to $500 million on the balance sheet, according to Byron Pollitt, Gap’s chief financial officer.

The San Francisco-based specialty retailer earned $370 million, or 40 cents a diluted share, in the three months ended Jan. 29 compared with $356 million, or 37 cents, last year. Analysts had anticipated 37 cents in the latest quarter.

Sales in the quarter were $4.9 billion, up 0.3 percent from the same period last year, while same-store sales fell by 3 percent. By division, same-store sales at domestic Gap stores were flat; comps fell 8 percent at Gap International, dropped 1 percent at Banana Republic and decreased 4 percent at Old Navy.

Three months after announcing plans to put Banana Republic in the Far East and one month after revealing plans for straight Banana Republic petites stores, the company described its international performance in the quarter and full year as disappointing.

Pressler said that international results “reinforced our commitment that more merchandise decisions must happen locally.” The company is building merchant teams in each country as well as a dedicated international design team in New York to ensure that products are appropriately tailored for customers in Japan and Europe.

Gap announced in November that it will open three Banana Republic stores in Japan this year.

In the year, Gap earned $1.1 billion, or $1.20 a diluted share, ahead of analysts’ expectations of $1.18. Comparatively, the company earned $1.03 billion, or $1.09, last year. Sales in 2004 were $16.27 billion, up 2.6 percent from $15.85 billion last year. Same-store sales were flat.

Gap said it expects changes to the way it accounts for store leases to reduce pretax earnings for 2004 and prior years by about $170 million to $200 million in total. But the company does not know whether this will require an official financial restatement in 2004, even though it is likely necessary for other years, especially 2002.

Looking ahead, Gap sees earnings of $1.41 to $1.45 for full-year 2005, reflecting proper accounting for store leases. The Wall Street consensus is $1.39.

Pollitt said Gap is “approaching 2005 conservatively and expects operating margins to improve to about 13 percent for full-year 2005 as we maintain and modestly build upon our solid improvement in 2004.”