By  on February 24, 2006

NEW YORK — Gap Inc. is still far from recovery. On Thursday, the struggling retailer reported declines in fourth-quarter and year-end sales, margins, earnings and traffic.

Net earnings for the fourth quarter were down 10.8 percent to $337 million, or 39 cents per share on a diluted basis, compared with $378 million, or 40 cents per share, for the same period last year. Fiscal year 2005 earnings per share were $1.24, up from $1.21 in 2004.

Net sales of $4.8 billion for the fourth quarter ended Jan. 28 decreased 2 percent compared with $4.9 billion for the same period last year. Comparable-store sales decreased 6 percent, compared with a decrease of 3 percent for the same period last year.

For the year, Gap posted sales of $16 billion, a 2 percent drop compared with $16.3 billion for 2004. Comp-store sales for the year decreased 5 percent, compared with flat sales last year.

Concerns about getting the product right and getting customers to shop stores with greater frequency surfaced during a conference call, but the news wasn't all bad. Officials said cash flow was up, enabling dividend increases and more share repurchasing; expenses were down, largely because TV advertising was temporarily scrapped; bonuses were lower; inventory management is improving and e-commerce is accelerating after Web sites were revamped. The officials stressed intensified efforts to improve product are in the works and characterized two launches, Banana Republic in Japan and the new Forth & Towne division aimed at an older audience, as "overall" successes, though Gap was hoping for more traffic at Forth & Towne. Five units are operating and 10 are slated to open this year.

"None of us is satisfied with the overall results. We did not deliver on expectations. We know we can do better," said Gap Inc. president and chief executive officer Paul Pressler. He cited the "strength of Gap brands, the balance sheet and talent in the organization" as the keys to a better future. "We are acting with a tremendous sense of urgency to win back our customers."

He added that the company is "100 percent focused on improving product in each of our brands" and that the level of traffic in stores "suggests we have not lost our customers. They are still visiting our stores, but shopping us less frequently than before because of product disappointment. We believe traffic lags product improvements by one or two quarters. The first half will be challenging and we will begin gaining traction in the second half."

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