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Gap Earnings Gain 25 Percent

Gap Inc.’s third quarter net earnings increased 25 percent to $307 million, or 44 cents a share on a diluted basis.

Inside Gap's 1969 New York Store.

Gap Inc. has earnings and margins rising, sales trends stabilizing and the balance sheet in order. Now comes the real tough part — grabbing market share.

“Looking ahead to the holiday season, we’re focused on gaining market share as we invest in marketing and present a strong value proposition to customers across our brands,” Glenn Murphy, Gap’s chairman and chief executive officer, said Thursday when the chain reported third-quarter net earnings increased 25 percent to $307 million, or 44 cents a share on a diluted basis.

Murphy added the third-quarter operating margin was the best in a decade, increasing to 13.9 percent, compared with 11.1 percent last year, and that “We have been spending more time in the last couple of quarters to work the mix.”

Third-quarter net sales increased 1 percent to $3.59 billion, compared with $3.56 billion last year. Third-quarter gross margin increased 380 basis points to 42.5 percent. Comparable store sales were flat compared with a decrease of 12 percent for the third quarter of last year.

The company is demonstrating greater confidence in its product by reviving Gap ads on TV and adding additional TV time for Old Navy. Moreover, Murphy said he is pleased with consumer response to Gap brand’s recent relaunch of denim, and the Stella McCartney collections for babyGap and GapKids launched for this season. He also said Old Navy’s re-engineered kids and baby categories were “really strong.”

Murphy confirmed McCartney’s collection will be reprised for spring. However, collaborating with designers or celebrities is “not part of our strategic thinking” as it is at H&M and Target. “We just thought Stella was the right fit.”

He also said he wants Gap to recapture dominance in denim. “It is a permanent part of our marketing message going forward,” Murphy said.

During a late-afternoon conference call after earnings were released, Murphy stressed that “Gap Inc. will be pushing to gain market share.” And for the first time since he became ceo more than two years ago, Murphy seemed somewhat bold in his outlook for Gap Inc.’s potential. Between its TV advertising investments and integrated marketing campaign, “We certainly expect our traffic to be better than overall mall traffic,” he said. “We are ready to be competitive and to make sure our value proposition stands out….Time will tell. Our goal within goals is to be better than mall traffic.”

But he added retailing will be “quite competitive in the fourth quarter. Consumer sentiment doesn’t seem to get much traction from quarter to quarter.”

The apparel business, he said, has “a natural volatility” that’s only compounded in tough economic times.

Gap has undergone a cultural shift, he said. “It’s about getting customers across the lease line as opposed to moving inventory. The customer psyche is, ‘Give me a reason to cross the lease line.’ We have got to stay close to them.”

Since the Nineties, getting traffic to its stores has been Gap’s biggest problem, along with providing compelling product.

The biggest positive swing in sales for the quarter, ended Oct. 31, occurred at Old Navy, which was up 10 percent compared with last year’s negative 18 percent. Gap North America was flat at negative 7 percent; Banana Republic was negative 6 percent versus negative 11 percent, and international was negative 6 percent versus negative 1 percent.

Flush with cash, Gap also unveiled a new $500 million share repurchase program.

Long-term growth initiatives, such as international expansion, will be discussed in further detail in the fourth-quarter conference call, Gap officials said.

Shares of the 3,100-unit Gap, based in San Francisco, fell 44 cents, or 2 percent, to $21.86 in trading Thursday.