Byline: Jennifer Weitzman

NEW YORK — Gap Inc. reported Wednesday that its profits sank 34 percent in the fourth quarter, and lowered its first-quarter earnings expectations, citing the uncertain economy.
Net earnings for the quarter ended Feb. 3 fell to $272 million, or 31 cents a share, beating Wall Street’s lowered consensus estimates by a penny. That compares with $414 million, or 47 cents earned a year ago.
Sales rose 19 percent, to $4.6 billion, compared with $3.9 billion in the year-ago period; comparable-store sales decreased 6 percent.
“Our performance last year was a disappointment,” said Millard Drexler, Gap chief executive officer, in a statement. “We didn’t execute well. But we’re a company that quickly learns from mistakes, fixes them and moves forward.”
During a conference call, Drexler said he is delighted about progress on the product side, noting that all divisions are getting pumped up with fashion newness and excitement, both missing over the past year.
He said that while business is slow, customers are responding positively to spring merchandise, particularly denim lines.
Looking back over the year, Drexler said Gap got too broad and missed a fashion point of view. “Being all things to all people doesn’t work,” he acknowledged.
Drexler said that Banana Republic stuck too long with the same point of view over the past three years, failing to excite customers. He noted that Banana Republic’s women’s division switched gears in the latter half of the year, with assorted “eye candy,” meaning trendier, appealing looks and “friendly” price points.
At Old Navy, he noted the difficult year stemmed from losing sight of the younger customer base it built over the past four to five years. He said that although the unit offered a broad assortment, it got less exciting and too high priced.
“Gap, Banana Republic and Old Navy are more sharply focused now on producing the right fashion, creating distinctive marketing and delivering consistent customer service,” he said. “We’re also aggressively managing costs and improving internal management processes. Although we remain confident in the long-term growth opportunities and fundamental strengths of our business, the current retail environment remains challenging. We are taking a conservative approach to 2001.”
Regarding the first quarter of 2001, chief financial officer Heidi Kunz said: “Business so far has been very difficult. To date, February comparable-store sales are in the negative low-double-digit range and margins continue to be under pressure.”
If the trend continues, she expects earnings for the quarter in the range of $0.10 to $0.15 per share. She added that Gap is expecting continued pressure in the second quarter. Still, she said that the company anticipates business improving in the second half of 2001.
Analysts were expecting 20 cents for the quarter, according to First Call.
For comps by division for the quarter, Gap domestic stores hit a negative low-single digit; Gap International hit a negative mid-single digit; Banana Republic fell a negative mid-single digit; and Old Navy yielded a negative low-double digit.
Deutsche Banc Alex.Brown’s Marcia Aaron said that she expects Gap to still be in for a difficult time this year. She said she is concerned that because the company is so large, it becomes difficult to keep growing. Nevertheless, she said Gap could get back on the growth track provided it seizes on more hot trends, like its popular polo fleece and khaki pants.
Gap also reported that net earnings for the year decreased 22 percent, to $877 million, or $1 a share, compared with $1.1 billion, or $1.26 last year. Sales rose 18 percent to $13.7 billion, compared with $11.6 billion and comp sales decreased 5 percent.
In 2001, the company said it expects a 17 to 20 percent increase in store openings, including 280 to 300 Gap stores in the U.S., 100 to 120 Gap International stores, 40 to 60 Banana Republic stores and 130 to 150 for Old Navy. It also expects a store growth rate in the range of 15 percent per year for fiscal 2002 and 2003.