Gap scales back annual profit forecast

Gap Inc., the largest U.S. clothing chain, cut its annual profit forecast after the wrong fashion calls on denim styles led to flat sales in the second quarter.

Gap forecast earnings of $1.30 to $1.34 per share compared with previous forecasts of as much as $1.48, according to a statement Thursday. The San Francisco-based company posted revenue of $3.72 billion, unchanged from a year earlier, as total same-store sales at Gap, Banana Republic and Old Navy stores declined for the fourth consecutive quarter.

August sales were "significantly below" expectations, and Gap cut prices to clear slow-moving summer merchandise, the company said. Gap has been losing denim sales to competitors including Abercrombie & Fitch Co. Chief Executive Paul Pressler is adding new jeans styles, opening a new chain for older women and has cut more than $2 billion of debt to lower interest expenses.

"Their products have been too middle of the road," said David Katz, chief investment officer at Matrix Asset Advisors in New York, which has about $2 billion in assets under management including more than 3 million Gap shares. "It just hasn't excited shoppers."

Net income rose 39 percent to $272 million, or 30 cents a share, from $195 million, or 21 cents, a year earlier, the company said today. Earnings increased in part because the company's interest expense dropped 82 percent to $8 million.

Gap was expected to earn 28 cents a share, according to the average estimate of 23 analysts surveyed by Thomson Financial.

The company said Thursday it expects to close about 140 stores, up from a previous forecast of 135. Most of those stores will be Gaps in the United States. The company will also add about 190 stores in fiscal 2005, up from a previous forecast of 170, most of them Old Navy. Gap had a total of 3,029 store locations as of July 30.

Pressler said demand at each chain dropped significantly because of a decrease in traffic. Banana Republic didn't have enough "essential items," such as neutral-colored pants and sweaters, while demand at Old Navy was hurt by lower men's and kids' sales, he said on a conference call Thursday.

"None of us are satisfied with our current performance," Pressler said. "We are laser focused on improving our performance." He said merchandise won't significantly improve until next year and that he doesn't see a need to change Gap's design teams.

Gap shares fell 55 cents, or 2.7 percent, to $19.60 after the close of regular stock market trading. The shares fell 32 cents to $20.15 at the close on the New York Stock Exchange. Before today, the stock had risen less than 1 percent in the past year, compared with a 98 percent gain for Abercrombie. The earnings results were issued after trading closed.

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