Gap Inc. Expands in Japan

The first three Japanese stores, scheduled to open in leading Tokyo shopping areas, will mark the first time that Gap has opened Banana Republic stores outside of the US. The company expects additional openings in Japan in the spring of 2006.

Japanese tourists and business travelers constitute an important segment of the customer base at Banana Republic locations in New York, Los Angeles and San Francisco, according to remarks by Paul Pressler, president and CEO of Gap, during the company's quarterly earnings conference call on Thursday.

The decision to open Banana Republic stores in Japan represents a big step for Gap, which currently operates about 240 Gap stores in the United Kingdom, France and Japan but does not have any stores other than Gap outside of the US. Of those 240, Gap operates about 75 stores in Japan. The Banana Republic locations in Japan could be a springboard to further expansion there in light of Gap's previously announced plans to go international with both the Banana Republic and the Old Navy brands. Andrew Rolfe, President of Gap Inc.'s International Division, says the company will tailor style, color and fit to satisfy customer preferences in the Japanese market. Pressler, in his comments, said that although Gap is disappointed with recent comparable store sales in its international division, "we've seen strong growth over the long term since Gap entered Europe in 1987 and Japan in 1995." The move to Japan will be an effort extend the geographic reach of a Banana Republic brand that counts more than 450 stores and annual sales of more than $2 billion in North America.

Gap announced its expansion into Japan simultaneously with its third-quarter earnings report, which shoed net profit of $265 million, or 28 cents per share. Earnings and sales were basically flat for the quarter in comparison with results for the previous year. Third quarter net sales increased to $4 billion, compared with $3.9 billion for the same period last year, and comparable store sales were down 1% for the quarter compared with an increase of 6% in the comparable period last year.

Along with the fashion and merchandising facets of its business, the company reported progress on the financial front that drew some congratulatory remarks from analysts participating in its conference call. The company reported that, after retiring $397 million in debt and repurchasing about 17 million shares for $338 million, it ended the quarter with $1.9 billion more in cash and short-term investments than debt. Year-to-date the company has retired about $871 million in debt, which has prompted the Moody's rating service to upgrade Gap to a credit rating just one notch below investment grade.

During the Thursday call, Gap officials did not provide estimates of next year's store count, square footage and capital expenditures. They said they will provide those numbers during the fourth quarter conference call as part of a "more complete set of guidance for 2005."