Byline: Valerie Seckler

NEW YORK — Aided by better cost controls and interest income of $5.8 million, The Gap Inc. reported Thursday that fourth-quarter profits rose 8.6 percent.
However, while total sales rose 14.1 percent, comparable-store sales were up just 1 percent. That troubled some analysts, who said Gap and Gap Kids divisions need to adapt more moderate pricing strategies. Last year, the analysts noted, comparable-store sales advanced 4 percent.
“They’ve got to get comp-store growth going or the company’s going to meander along,” said Peter Schaeffer, analyst at Dillon Read.
Gap stock closed at 31 1/8 Thursday on the New York Stock Exchange, down 1 7/8.
Earnings for the quarter ended Jan. 28 set a company record. They reached $118.7 million or 82 cents per share, compared with $109.3 million or 75 cents. Sales climbed to $1.2 billion from $1.1 billion.
Bear Stearns analyst Steven Kernkraut said Gap’s record fourth quarter earnings were “better than expected. We had estimated earnings per share of 76 cents.”
“The good news for Gap is that their improvement in expense controls was significant and their $5.8 million increase in interest income was also better than anticipated,” he said. By comparison, Gap’s interest income in the year-ago period was just $730,000.
Gap pared its operating expenses in the quarter to 20.5 percent of sales from 22.1 percent.
Despite the pricing issue at Gap and Gap Kids, the two chains are driving the corporation’s earnings growth, Kernkraut said: “Gap and Gap Kids outstrip Gap Inc.’s operating margin of 13 percent. The margins at both chains could very well be at 15 percent.”
Also pushing Gap’s net upward, said Kernkraut, was an improvement in Banana Republic’s operating margin, “which Gap says has finally broken through the double-digit barrier.”
“I suspect Banana Republic’s operating margin is around 10.5 percent,” he estimated, up from its previous 6 to 7 percent range.
Nevertheless, Dillon Read’s Schaeffer said, “As well as Banana Republic is doing and as strong as Old Navy will become, the company can’t get top-line growth unless they turn around Gap. If they can do that, the company will take off.”
Gap “missed the boat in terms of value pricing,” said Schaeffer, as department stores went to more moderate prices while Gap increased better pricing.
“The question is how quickly can they turn Gap and Gap Kids into more moderate businesses,” he added. “They’ve done it with some items like jeans and angora sweaters, but they need to do more. Lots of consumers have gone to buying more moderate-price items.”
In the fourth quarter of 1993, Gap and Gap Kids “hit the fashion cycle perfectly,” he recalled. “This year, they faced the outerwear glut,” which plagued retailers in unseasonably warm parts of the country.
Overall gross margin in the quarter eroded to 36.2 percent from 39 percent.
Earnings for 1994 surged 23.9 percent to $320.2 million, or $2.20 per share, from $258.4 million, or $1.78. Sales grew 13 percent to $3.7 billion from $3.3 billion as same-stores sales increased 1 percent.
Kernkraut estimated Gap will earn $2.50 per share in 1995, and 47 cents in the first quarter, up from 44 cents in the prior-year. — Fairchild News Service