By  on February 25, 2005

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:

  • 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.

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