Gap Inc. on Thursday said same-store sales in the second quarter declined, but the company still managed to make a profit.

This story first appeared in the August 19, 2011 issue of WWD. Subscribe Today.

During a Webcast for investors and analysts, Glenn Murphy, chairman and chief executive officer of Gap, stressed the progress of the company’s international division, while expressing concern over the Gap brand’s women’s business. “We need to get better right away in our women’s product,” he said. “Gap is a redo. We’re trying to transition the Gap brand aesthetic. It got a little too modern for our customers.”

The San Francisco-based retailer reported net income in the second quarter fell 19 percent to $189 million, from $234 million for the same period in 2010, and second-quarter diluted earnings per share were 35 cents, compared with 36 cents last year.

Net sales for the second quarter ended July 30 increased 2 percent to $3.39 billion, from $3.32 billion in 2010. Same-store sales in the period, including associated comparable online sales, dropped 2 percent, versus a 1 percent increase in the second quarter of last year. Online sales positively impacted Gap’s comps by 2 percentage points in the period. Net sales at Gap Direct rose 20 percent to $309 million. Operating expenses were flat versus last year and decreased 50 basis points as a percentage of net sales.

Second-quarter comps fell at three out of four of the company’s divisions. Comps declined 3 percent at Gap North America, versus negative 3 percent last year; 2 percent at Banana Republic North America, versus positive 4 percent last year; 4 percent at the international division, compared with positive 3 percent in 2010, and comps were flat at Old Navy North America, compared with positive 2 percent last year. “We’ve negative-comped for two quarters in a row,” Murphy said. “That’s below our standards.”

The firm’s sales for the first half were $6.69 billion, versus $6.65 billion for the first half of 2010. Net profits were $422 million, compared with $536 million for the same period a year ago.

Murphy said the firm would expand Athleta stores in the New York, Los Angeles, Washington, Minneapolis and Philadelphia markets. The active brand last week opened two units in Manhattan. has been adding more exclusive brands and will introduce men’s wear this month.

“The international business has made a lot of progress,” added Murphy, who is bullish on China, where 10 new Gap units will open this year, including a “major” flagship in Hong Kong, opening on Nov. 1. Murphy also divulged that the company had added two cities to its China strategy, which originally called for opening stores in Shanghai, Beijing and Hong Kong only.

Gap, which unveiled a flagship in Rome, plans to open five new units in Italy by the end of the year. Six international outlet stores bowed in the first half of 2011 and 16 more are slated to bow in the second half. There were new franchise units unveiled in Egypt and Ukraine in the second quarter. Agreements to bring stores to Serbia and Morocco were announced. Murphy said Gap will open in an “unprecedented” seven new countries in the second half of the year. Gap has an online presence in 22 European countries and China, where “the online business is super-impressive,” he said.

The ceo said marketing for Gap and Old Navy was not effective in the second quarter and “didn’t pull and drive traffic as much as we wanted. We’re fixated on getting new customers into Gap stores. You’ll see more [campaigns] like 1969, where the story was genuine and real.” He said he hopes Old Navy finds its “spirit and personality in the second half.”

Murphy conceded that Gap is losing market share to “department stores such as Macy’s and Old Navy’s seen a deceleration of the number of shopping trips, so a multiple category retailer or one-stop shop like Target is a competitor.”

In the second quarter, the company focused on growing top line sales, maintaining expense discipline, investing in long-term growth and returning cash to shareholders. Gap said it returned $880 million to shareholders during the quarter with $820 million in share repurchases and $60 million in dividends.

“We’ve been questioning our merchandise model for the last six to nine months,” Murphy said. “We cut our pipeline and are evolving our business on speed and getting closer to our customers.”

CapEx for fiscal 2011 to date is $261 million, and the company said full fiscal 2011 capital spending will be about $575 million. Gap expects net openings of about 75 stores, including franchise units, in fiscal year 2011.

The company reaffirmed its guidance for fiscal year 2011 of diluted earnings per share of $1.40 to $1.50. Gap’s stock on Thursday closed at $15.52, down 9 cents on the New York Stock Exchange.

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