Gap Sees Slow First Half

The company earned net income of $337 million, or 39 cents per share for the fourth quarter, compared with $378 million, or 40 centsper share for the same period last year. Fiscal year 2005 earnings per share were $1.24, up from $1.21 for fiscal year 2004 on net income that declined to $1.11 billion from $1.15 billion.

"None of us is satisfied with our overall 2005 business results," Gap president and CEO Paul Pressler said Thursday as company officials discussed fourth quarter and full-year financial results during a conference call with financial analysts. Byron Pollitt, CFO, cited "uncertainty regarding the timing of the turnaround" and month-to-date traffic that is down 13% in February as reasons that Gap expects total comparable store sales to remain negative in the first half of fiscal year 2006 and turn modestly positive in the second half of fiscal year.

Net sales of $4.8 billion for the fourth quarter ended Jan. 28 decreased 2% compared to $4.9 billion for the same period last year, with comparable store sales dropping 6% for the period. Net sales of $16 billion for the 52 weeks ended Jan. 28 also decreased 2% in comparison to $16.3 billion for the same period the previous year, with comparable sales dropping 5% for the year.

Gap's strategy includes opening new stores and closing old ones, with about $470 million of its $600 million in fiscal year 2006 capital expenditures earmarked for store openings and remodeling. The company expects to open about 175 stores this year, weighted toward Old Navy brand, and to close about 135 store locations, weighted toward the Gap brand. Square footage is expected to increase between 1% and 2% for fiscal year 2006. During 2005, the company opened 198 locations and closed 139, finishing the year with net square footage up 3%.

Pressler said in the conference call that Gap Inc.'s long-term success "requires growing our top line," and that growing it will require "improving the product in each of our brands." He cited a decline in traffic but said the decline in traffic alone did not explain the sluggish sales. "We have not lost our customers. They are still visiting our stores. But, because they've been disappointed with our product offerings, they're shopping us less frequently than before," Pressler commented.

If Gap can make product improvements each season, "our traffic will follow," Pressler said. He added, "We believe that traffic lags product improvement by one or two quarters, so we expect that the first half of 2006 will be challenging and that we will begin gaining traction in the second half."

Despite the "disappointing top-line results" in 2005, according to Pressler, "We used our strong cash flow to double our dividend and complete a $2 billion share repurchase program. We also delivered on our growth initiative, launching Forth & Towne, introducing Banana Republic in Japan, developing a franchise capability and signing our first agreement, and building new online systems."

Gap operated 3,117 stores as of Jan. 28, up from 3,051 at the end of the previous fiscal year. It added 71 Old Navy stores during the year but it trimmed the number of Gap stores by 56.