By and  on March 4, 1994

NEW YORK -- Earnings at The Gap Inc. shot up 66 percent in the fourth quarter, boosted by improved margins at The Gap, GapKids and Banana Republic divisions.

In addition, the company is accelerating its expansion, planning about 200 new units this year, including the rollout of its Gap Warehouse concept under a new name -- Old Navy Clothing Company.

The first two Old Navy units are slated to open next Friday in two towns in the San Francisco area, Colma and Pittsburg. The plan is to have a fleet of 45 units operating this year. Old Navy Clothing Company represents a refinement of the 45 Warehouse stores already operating. The stores will be bigger than the Warehouses, with about 15,000 square feet of space for selling women's, men's, children's and infants' apparel at prices lower than those at traditional Gap stores.

In the quarter ended Jan. 29, earnings at the San Francisco-based retailer rose to $109.3 million, or 75 cents a share, from $65.7 million, or 46 cents. Sales climbed 14 percent, to $1.06 billion from $930.2 million, with same-store sales up 4 percent.

For the year, earnings rose 23 percent, to $258.4 million, or $1.78, from $210.7 million, or $1.47. Sales rose 11 percent, to $3.3 billion from $2.96 billion with same-store sales up 1 percent.

Donald G. Fisher, chairman and chief executive officer, said the earnings increase for the year was "especially gratifying" since profits dropped in the first half of 1993.

"Merchandise margins improved at all divisions, the result of an increased emphasis on fashion merchandise, better inventory management, and fewer markdowns. Additionally, GapKids and International turned in strong sales performances for the year," Fisher said.

The company told analysts Thursday that same-store sales at the Gap chain dipped slightly in the quarter, while Banana Republic was up modestly and GapKids rose sharply. All three divisions, however, posted strong margin improvement.

The Gap's earnings in the quarter -- 75 cents a share -- topped Wall Street estimates of 70 to 72 cents a share. Shares of The Gap climbed 1 1/8 to 46 1/8 Thursday on the New York Stock Exchange. "The Gap's numbers were just terrific," said Bruce M. Missett, at Morgan Stanley. "The bottom line is that they managed their business incredibly well, in product content and gross margins."Gross margins in the quarter improved to 39 percent of sales from 32.5 percent a year earlier.

"It was an excellent quarter," said Barry Bryant, at Ladenburg, Thalmann, citing margin improvement as the key.

"There wasn't incredible strong sales growth, but I think one of the realities in the Nineties is that retailers are not going to get the sales growth they did in the Eighties," Bryant said. "It's important to focus on cost control and margins." Bryant looks for The Gap to earn $2.10 a share this year.

The Gap plans to accelerate expansion with 55 Gap, 45 GapKids and 15 Banana Republic openings slated in the U.S. this year. Thirty Gap and GapKids openings are planned for Canada, the U.K. and France.

The Gap expects $275 million in capital expenditures this year to fund expansion. In 1993, 108 stores were opened. As of Jan. 29, the Gap operated 881 Gap, 310 GapKids and 179 Banana Republic stores. In other news, David M. DeMattei resigned as president of the Banana Republic division last Friday, raising questions about the unit's performance.

However, Warren Hashagen, senior vice president of finance, said DeMattei's departure was part of a reorganization of the division and had nothing to do with performance. He said The Gap is very pleased with Banana Republic's recent results, which the company does not break out. Hashagen said that under the reorganization, senior executives at Banana Republic now report to Millard Drexler, president and chief operating officer of The Gap.

Hashagen said, "There are no plans to name a successor to DeMattei soon."

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