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Gap Reports Profit Virtually Unchanged

Gap's second-quarter net earnings were practically flat due to cost cutting and expense controls.

At Gap Inc., the glass seems half filled.

This story first appeared in the August 21, 2009 issue of WWD.  Subscribe Today.

Continued cost cutting and expense controls offset weak sales, enabling Gap to report virtually flat net earnings for the second quarter ended Aug. 1 and looking relatively good considering most retailers are reporting losses or declining profits.

The specialty chain reported net profits of $228 million, or 33 cents a diluted share, compared with $229 million, or 32 cents a diluted share, for the second quarter last year.

Second-quarter net sales were $3.25 billion, down 7.1 percent from $3.5 billion for the second quarter of last year. Comparable-store sales fell 8 percent, compared with a decrease of 10 percent for the second quarter of 2008. Online sales increased 17 percent to $224 million, compared with $191 million.

“We’re proud to deliver second-quarter earnings per share above last year, especially during a challenging environment,” said Glenn Murphy, chairman and chief executive officer. “Our focus is to find the right balance between maintaining our cost discipline and making appropriate, targeted investments to gain back market share.”

Murphy later stressed in a conference call that the retailer’s balance sheet is healthy but that building traffic and comparable-store sales, and communicating its pricing message, particularly at Old Navy and the outlets, are priorities.

The company ended the quarter with $2.1 billion in cash and cash equivalents, an 11.6 percent operating margin compared to 10.7 percent in the year-ago quarter and with a 150 basis point increase in gross margins. Operating expenses in the quarter were down about $50 million compared with the second quarter last year, and since the beginning of fiscal year 2007, operating expenses are down about $650 million.

Officials also disclosed:

• Gap Inc. is now making “targeted selected marketing investments to gain market share.”

• Fifty more Old Navy stores will be remodeled in the next two months, after four test remodels were launched earlier this year.

• Gap’s Piperlime Web site will introduce apparel with contemporary styles at the beginning of September.

• The company will work on strengthening its pricing message, particularly at Old Navy and the outlets, and would, as Murphy said, “err to make sure the value part of all our brands is clear and comes through to the customer.”

• The Gap brand could resume television advertising in the fourth quarter. The strategy will be considered in the coming weeks, Murphy said.

In addition, Murphy said Gap will celebrate its 40th anniversary today by dressing up the New York Stock Exchange in 1969 Premium Jeans, a new collection launched last week and named in honor of Gap’s debut year. Gap officials will remotely ring the exchange’s closing bell today from Gap headquarters in San Francisco.

By division, Gap North America was down 10 percent to $878 million in sales; Banana Republic North America was down 15 percent to $516 million; Old Navy North America was down 4 percent to $1.24 billion, and the International division was off 5 percent to $361 million.

The company expects operating expenses in the third quarter to be flat to up about $20 million compared with the third quarter of last year, primarily due to an increase in marketing expense of about $25 million.

Gap Inc. ended the second quarter with 3,145 store locations, and net square footage decreased 0.3 percent from the end of fiscal year 2008. Year to date, the company has opened 23 store locations and closed 27. Gap Inc. continues to expect that it will open about 50 stores and close about 100 stores this year, bringing square footage down about 2 percent.