Gap’s 3Q profit down 36 percent

NEW YORK (AP) — Gap Inc. said Thursday that its third-quarter profit fell 36 percent, confirming the challenges the clothing company faces heading into the holiday shopping season.

The San Francisco-based operator of the Banana Republic, Gap, Old Navy and Athleta chains has been struggling for years to reclaim its former fashion status. Its Gap chain, in particular, has reported annual sales drops the last six years at stores open at least a year in North America, a key measure of a retailer’s health.

Continued deep discounting and rising costs have only compounded the largest U.S. clothing seller’s troubles.

The company has closed or shrunk Gap stores and last month detailed a plan to close 189 locations, or 21 percent of its namesake Gap stores in the U.S., by the end of 2013. At the same time, the company aims to triple the number of Gap stores in China from about 15 next month to roughly 45 a year later.

Overall, the company intends to cut its square footage in the U.S. by 10 percent by 2013, compared with 2007, and to double the share of its revenue that comes from outside of the U.S. to 30 percent.

A February management shake-up ended with a new president for the Gap brand, and in early May, the chain’s design director, Patrick Robinson, was ousted.

CEO and Chairman Glenn Murphy said during a conference call Thursday with analysts that the company is “ready to compete” in the critical holiday season.

“We’ve got to make sure that our marketing works harder, that our windows are great, that our store presentation is stronger than you’ve seen,” Murphy said. “I know that the state of readiness is very high. We have to make sure we’re making very good decisions and that our brands and their value propositions are strong in the fourth quarter.”

Gap said it earned $193 million, or 38 cents per share, for the three months that ended Oct. 29, compared with $303 million, or 48 cents per share, a year earlier. Its overall revenue slipped just 1.8 percent to $3.58 billion.

That slightly higher profit than analysts expected. They were looking for earnings of 36 cents per share and revenue of $3.59 billion.

Shares of Gap Inc. rose 26 cents after hours. Before the company reported its results, they closed at $19, down 48 cents, or 2.5 percent, as the markets slipped overall.

The company’s third-quarter revenue at stores open at least a year dropped 5 percent, including online sales. Gap executives said the company struggled to sell women’s clothing during the period. By division, the figure fell 6 percent for Gap stores in North America, but 1 percent for Banana Republic’s North America fleet and 4 percent for Old Navy’s.

During Gap Inc.’s annual meeting with analysts last month, executives said they plan to have closed 34 percent of Gap stores between 2007 and the end of 2013, not including Gap Outlets. That will leave 700 Gap stores. The company said it aims to maintain its Old Navy stores in North America but make them smaller.

Gap is testing new merchandising and marketing ideas. Gap Kids has collaborated with designer Diane von Furstenberg to design a children’s line for next spring. And during next week’s kickoff of the holiday 2011 shopping season, nearly 1,000 stores across the company’s brands will open on Thanksgiving Day in the U.S.

The company said the whole holiday season is important, particularly for its Gap stores. Shoppers often turn to the company’s well-known chains through the end of December seeking last-minute gifts. So Gap will try new promotions and offers aimed toward improving sales all next month.

The holidays could be just as challenging as the fall because of commodity cost increases. Gap told investors back in May that it had ordered only spring and summer goods by February, and it assumed costs would ease after it ordered fall goods.

But that didn’t happen. When the chain started negotiating with suppliers in March and April for holiday orders, it found costs had soared. The company expects costs to ease some in the spring.

Gap stood by its full-year forecast. It expects to earn between $1.40 and $1.50 per share. Analysts had expected $1.50 per share, according to Factset.

The company announced plans Thursday to repurchase up to $500 million worth of its shares. In the first three quarters this year, it spent $2 billion buying back shares.

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