NEW YORK — Gap Inc. didn’t only raise its waistlines in the fourth quarter, it lifted its earnings as well.
The San Francisco-based specialty retailer, founded in 1969 as a purveyor of jeans and other counter-cultural matter, late Thursday reported its second straight increase in quarterly profits and a full year of profits.
For the three months ended Feb. 1, improvements throughout the business drove up net income to $248.7 million, or 27 cents a diluted share, in line with its own as well as Wall Street estimates. This reversed a year-ago loss of $34.2 million, or 4 cents.
Sales for the quarter increased 13.7 percent to $4.65 billion over sales of $4.09 billion. Comparable-store sales increased 8 percent, with all divisions in positive terrain: Old Navy, 14 percent; Banana Republic, 5 percent, and Gap, 4 percent. Sales productivity grew by 10 percent to $120 per square foot versus $109.
"Results reflect more successful product execution and a more focused assortment," Byron Pollitt, Gap’s new chief financial officer, said on an afternoon conference call. "We moved toward a more brand-appropriate style and became more narrow and deep on key items."
Despite the dismal retail environment, Gap in the fourth quarter experienced higher conversion rates and higher average unit retails, reflecting customers’ acceptance of both Gap’s product and inventory strategy.
In 2000 and 2001, Gap’s reliance on the low-rise jeans helped get it into trouble as the company suffered from deep markdowns and what would eventually tumble into 29 straight months of same-store sales declines. And it started to report decreases in earnings, beginning in April 2000, and even lost money in the third and fourth quarters of 2001.
But as the company has strived in recent months to serve "Every Generation" by returning to classic, casual clothing, Gap last October managed its first comp increase after a 2 1/2-year losing streak and the momentum continued into the holidays. The company even managed to increase its regular-priced selling and improve its markdown margin.
Although Gap has a new leader at the helm in Paul Pressler, it was Millard "Mickey" Drexler who steered the ship straight after nearly drowning it with tight leather pants and belly-baring shirts.Nevertheless, while Drexler may not be around, Pressler expressed pride in the company’s solid performance and said by focusing on executing well in the fourth quarter, the comp and earnings results reflect that effort.
"We focused on the fundamentals of the business and began the process of getting the company back to earnings growth," Pressler said, adding improved product design, a more balanced assortment of brand-appropriate merchandise and customer service drove the results.
Nevertheless, Pressler said he recognizes there is work to do. "The early achievement is only a down payment on the larger commitment to shareholders, customers, employees and their families," he said. "We need to earn the right to grow."
The results support Gap’s 16 percent increase in marketing expense during the fourth quarter, to $134 million, and its 17 percent boost for the year, to $496 million.
While Gap may have lost sight of who its customers are, Pressler said he is committed to getting market data and listening to consumers to gain insights into to their emotional connection to Gap as an American brand.
"Our strength is our ability to interpret fashion into an appropriate brand, but we need to support it with research to validate and influence a strategy," Pressler said.
Gap said it generated consumer data through store visits and shop-alongs as well as online surveys, in-store forums, Gallup polls and information from its 120,000 store employees.
"The customer experience will drive the way we run all aspects of our business," Pressler asserted.
For the full year, Gap reported earnings of $477.5 million, or 54 cents a diluted share, compared with a loss in the prior year of $7.8 million, or 1 cent. Sales for the 12 months inched up 4.4 percent to $14.45 billion, versus sales of $13.85 billion last year, but decreased 3 percent on a comp basis. Old Navy was up 1 percent, while Gap and BR were both down, 7 percent and 1 percent, respectively.
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