By  on August 24, 2007

Glenn Murphy is getting off on the right foot.

While the new Gap Inc. chairman and chief executive officer, who started at the beginning of August, can't take any of the credit, on Thursday the company he's charged with turning around revealed its first quarterly earnings increase in two years — even as the group continues to struggle on the sales side.

And as Gap upped its forecast for the year, Murphy promised to "unleash and reward creativity" and said he's been telling employees "the size of the challenge we have before us is easily surpassed by the opportunities we have ahead of us."

Helped by cost reductions and better inventory management, Gap Inc. reported a 19 percent increase in second-quarter net profits to $152 million, or 19 cents a diluted share. That compares to $128 million, or 15 cents a diluted share, in the year-ago quarter.

The last time Gap reported an earnings increase was in the second quarter of fiscal 2005, when the net rose 39 percent. Gross margins in the second quarter ended Aug. 4 increased 34.3 percent, up 130 basis points.

But Murphy clearly has his work cut out for him as sales remained difficult at the group amid concerns about product acceptance. Gap said summer merchandise got a "mixed response in all divisions," though with inventories down 2 percent, the company said it feels comfortable with current fall levels.

Comparable-store sales were down 5 percent, while total sales fell 1 percent to $3.69 billion, compared with $3.71 billion for the year-go quarter. The difference between comps and total sales was mostly due to online sales, which increased 26 percent to $172 million, from $136 million.

By division, Gap division sales were down 6 percent; Banana Republic was up 4 percent, and Old Navy was down 9 percent.

The company, which has been cutting staff and other expenses, upped its forecast of earnings per share on a Generally Accepted Accounting Principles basis for the year to 83 cents to 88 cents from its previous guidance of 76 cents to 86 cents. On a non-GAAP basis, which would exclude expenses associated with the discontinued Forth & Towne division and other cuts, Gap forecasts 90 cents to 95 cents, compared to previous guidance of 80 cents to 90 cents.

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