Gap's Profit Sinks

Speaking at the company's quarterly conference call with financial analysts, Pressler said the problems that Gap faces are "fixable," telling the financial analysts that the company is "aggressively executing plans to provide more compelling product" in its stores.

Gap earned $212 million for the quarter, or 24 cents per share on a diluted basis, compared with $265 million, or 28 cents per share, for the same period last year. Third quarter net sales dipped to $3.9 billion from $4 billion for the same period last year. The 7% comparable store sales decrease compared with a decrease of 1% in the third quarter of last year.

Byron Pollitt, Gap's EVP and CFO, said during Thursday's conference call that the company has reduced its projected fiscal year 2005 earnings per share to the range of $1.12 to $1.17, down from the previous range of $1.30 to $1.34 that it forecast during the second-quarter conference call. Pollitt cited "weak traffic across all three brands" as the reason for the reduced expectations and also as "the primary lever" that produced the negative comps in the third quarter.

"Since our last guidance update," Pollitt said, "traffic has deteriorated at all three brands beyond what we originally contemplated." Traffic declined 8% through the second week of November, he said, and the company's earnings forecast assumes a continuation of that trend.

In answer to an analyst's question about whether Gap might slow its expansion of the Old Navy brand in light of continued declining comps in that chain, Pollitt said, "No, we are not." He added, "The business model for Old Navy is rock solid, and even with the challenges we've had on the top line over the past several quarters, the returns on the Old Navy business model are excellent; we do not intend to take our foot off the accelerator."

Gap Inc., which opened 99 stores and closed 11 through the first three quarters, now expects to open about 195 stores this fiscal year, up from its previous estimate of 190. The company now expects to close about 145 stores, up from its previous estimate of 140. In general, it plans to open more Old Navy stores and close more Gap locations.

One analyst questioned whether Gap might have too many locations or stores of the wrong size to compete against newcomers that have done well, including competitors that have grown quickly by offering casual sportswear with more of a youth focus. Pressler answered that the company is "optimizing our fleet" of Gap stores but believes the solution has more to do with merchandise than store size or number of locations.

"It comes down to the big question of our product," Pressler said. Gap has closed locations that it felt were never going to be viable and has allocated square footage in different ways, the Gap CEO said, but the store changes are not going to work "unless we've got the right product."