Feb 24, 2012
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Gap's profit view tepid but turnaround gains steam

Feb 24, 2012

Gap Inc's profit forecast for the year ahead failed to excite investors, but the company did lay down concrete plans for a revamp as it tries to work on its merchandise and move away from the heavy discounts seen in the holiday quarter.

Old Navy merchandising - Image: Old Navy

For almost a decade now, Gap has struggled with its fashion mix, losing out to rivals such Inditex, which overtook Gap as the world's biggest clothing retailer by sales in 2010.

The company has rejigged its top management over the past year and Chief Executive Glenn Murphy said the retailer will invest more online, in international sales and in reviving the look of each brand as they try to pick up momentum and gain back some market share.

"The plan now seems more focused than it did before and they are trying to get the merchandise right," said Jaime Katz, an analyst at Mornigstar.

"The proof is in the pudding, but they are at least moving in the right direction."

Last year, during spring and even in the latest holiday season, the company's sales were hurt by a line of clothes that lacked color.

This year, brightly colored denims and shirts have been shipped to stores - the result of changes made to its top management - which many analysts think could turn the company's sales around.

The company also approved a new $1 billion share repurchase program and raised its annual dividend to 50 cents a share from 45 cents in 2011.

"You can't frown on a company that says we are giving you cash back and raises dividends," analyst Katz said, adding that the new spring merchandise in stores looked more competitive than in recent years.

The owner of the Gap, Old Navy and Banana Republic chains, expects to earn $1.75 to $1.80 a share in fiscal 2012, while analysts, on average, were expecting $1.79 a share, according to Thomson Reuters I/B/E/S.

Gap preannounced that sales fell 2 percent to $4.28 billion, while comparable store sales were down 4 percent.

For the quarter ended Jan. 28, the company, which competes with Uniqlo parent Fast Retailing Co, H&M owner Hennes & Mauritz AB and Zara owner Inditex, earned $218 million, or 44 cents a share, compared with $365 million or 60 cents a share last year.

Net profit fell 40 percent.

"In spite of 2011 earnings being below last year, we're pleased with the progress we made against our long-term strategic plan, including growing our online business and expanding internationally," said Chief Executive Glenn Murphy.

Gap shares were down at $23.25 on Thursday in late trading. They closed at $23.52 on the New York Stock Exchange.

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