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Gap Plots Chinese Expansion, U.S. Store Cuts

At its annual investor meeting, executives outlined plans to have 45 units operating in the world’s most populous nation by the end of 2012.

NEW YORK — Undeterred by the current weakness in its international unit, Gap Inc. plans to triple its presence in China in the space of one year even as it continues to downsize its North American operations.

At its annual investor meeting, held Thursday at the Gap Global Creative Center here, company executives outlined plans to have 45 Gap units operating in the world’s most populous nation by the end of 2012, roughly three times the number expected to be in operation by the end of the current fiscal year. A flagship in Hong Kong is planned to open Nov. 1.

Meanwhile, Sabrina Simmons, executive vice president and chief financial officer, said that the Gap brand’s nonoutlet fleet in North America, which stood at 889 at the end of the first half, would pare down to about 700 stores by the end of 2013, putting its store count 34 percent lower than in 2007.

“And we plan to add about 50 new [Gap] outlet stores over the same period,” Simmons said.

Old Navy concluded the second quarter with 1,022 stores, all in North America, totaling 18.5 million square feet, close to half the company’s total. By the end of 2013, the plan is to have roughly the same number of stores but about 1 million square feet less.

Stephen Sunnucks, president of Gap’s international unit, said that the company expected to double the number of stores operated through franchise arrangements, its preference in smaller offshore markets, to about 400 by the end of 2014. At the end of the second quarter in July, the number stood at 195. Revenues of franchise stores increased 48 percent during the first half of the year, the company noted.

The company is in the final month of its fiscal third quarter, a period marked by large declines in its international comparable-store sales. In August, international comps were off 9 percent as the company’s overall drop came in at 6 percent. Although the corporate descent was smaller in September, at 4 percent, international comps dropped 13 percent, their largest contraction since a 14 percent pullback in June 2006. Second-quarter international comps fell 4 percent, twice the overall rate for the company.

Acknowledging recent challenges in the U.K. and Japan, Sunnucks noted that new stores in China and Italy were performing well. In the first half of the current fiscal year, retail sales outside North America rose 16 percent, topped only by e-commerce’s 19 percent gain.

Gap reaffirmed its goal, laid out at its annual meeting in May, of building online sales and those outside North America to 30 percent of total revenues and also stuck by its full-year earnings guidance of $1.40 to $1.50 a diluted share.

Shares Thursday rose 7 cents, or 0.4 percent, to close at $17.92.

Glenn Murphy, chairman and chief executive officer of the San Francisco-based specialty retail giant, opened and closed the meeting with emphasis on the need for Gap to produce better merchandise more consistently and asserting that the firm, as evidenced by the meeting’s location, was moving in the right direction from both a product and marketing standpoint.

“We may have a good strategy,” he told investors. “We know we have great brands [but] we’ve got to win on product.”