Gap profit rises, CEO sees new focus on margins

LOS ANGELES (Reuters) - Gap Inc (GPS.N) on Thursday posted a 21 percent rise in quarterly profit and pledged to focus on improving profit margins this year while persuading shoppers to give its brands a second chance.

Gap shares rallied 6 percent after the operator of the Gap, Old Navy and Banana Republic apparel chains also announced a $1 billion share buyback authorization and said the founding Fisher family had agreed to sell some shares.

Gap has been controlling inventory and reducing markdowns as it battles a challenging retail environment. Store traffic is down and shoppers have been cutting back on spending. Past fashion missteps at the company have alienated core shoppers, who have gravitated to rivals in recent years.

"No matter how ugly it is, if you have less (inventory) there is less to mark down," said Stifel Nicolaus analyst Richard Jaffe said. "It's much harder to manage or control the appeal of the product, to inspire the consumer."

Fourth-quarter net profit was $265 million, or 35 cents per share, matching Wall Street expectations, according to Reuters Estimates. A year earlier, the company posted net profit of $219 million, or 27 cents per share.

Gap aims to turn around years of sliding same-store sales by pepping up merchandise as well as marketing. But a focus for 2008 will be on gross profit margin, said Chief Executive Glenn Murphy, while acknowledging a need for sales growth.

"We will improve our earnings with a focus on growing margin dollars," Murphy told analysts on a conference call.

The strategy is appropriate, said analyst Jaffe. "It's not a sufficient strategy for them to win the ballgame, but it will certainly help them do better in the next few innings."

Murphy, who is in the seventh month on the job, said he felt "better about the business than when I joined."

He acknowledged inflation pressure "headwinds," but said he still saw opportunities to lower costs.

A WIDE OUTLOOK GIVEN THE UNKNOWNS

As previously reported, fourth-quarter net sales fell 5 percent to $4.7 billion while same-store sales, a key gauge of retail performance, declined 3 percent.

Gap said it would raise its annual dividend to 34 cents from 32 cents a share.

Operating margins, which rose to 8.3 percent in fiscal 2007 from 7.4 percent a year earlier, are expected to range from 8.5 percent to 9.5 percent for fiscal 2008, Gap said.

Gap said it expects to reduce capital spending to about $500 million in fiscal 2008 from $682 million in fiscal 2007.

The company expects to open about 100 stores in fiscal 2008 and close about 85, mostly Gap stores. Wall Street has largely considered the brand oversaturated in North America, but stores there will open "in very select situations," Chief Financial Officer Sabrina Simmons said.

For fiscal 2008, Gap estimated earnings of $1.20 to $1.27 a share, taking into account "a range of outcomes dependent in part on product acceptance and the volatile macroeconomic environment."

Wall Street analysts, on average, have been expecting 2008 earnings of $1.23 a share, according to Reuters Estimates.

Gap, which operates more than 3,000 stores around the globe, is valued at 16 times estimated 2008 earnings, a premium to Limited Brands Inc (LTD.N) and Macy's Inc (M.N), at nearly 15 and 13, respectively.

Gap shares rose to $20.60 in after-hours trading. They closed down 2.11 percent, or 42 cents, at $19.45 on the New York Stock Exchange.

(Reporting by Alexandria Sage, editing by Richard Chang)