UPDATE 2-Gap's July same-store sales fall 7 percent

(Changes dateline; previous NEW YORK; recasts, adds details, background)

LOS ANGELES, Aug 9 (Reuters) - Apparel retailer Gap Inc.(GPS.N) said on Thursday that sales at stores open at least a year fell 7 percent in July, as weakness at its Old Navy stores offset improvements at its Gap and Banana Republic chains.

Analysts, on average, had been expecting a same-store sales decrease of 4.7 percent, according to Reuters Estimates.

Total sales for the four weeks ending July 29 rose 1 percent to about $1.05 billion.

But the San Francisco-based company -- which recently named Canadian drugstore executive Glenn Murphy as chief executive -- gave a second-quarter earnings outlook that was above Wall Street estimates.

"During July, we cleared through summer product at all three brands and total company merchandise margins were significantly above last year," Sabrina Simmons, Gap's senior vice president of corporate finance, said in a statement.

Same-store sales at the Gap in North America rose 2 percent in July compared with a 13 percent decline last year and they inched up 1 percent at the more upscale Banana Republic chain, compared with a flat total a year earlier.

But same-store sales at Old Navy, the company's lower-cost chain geared to families, fell 18 percent in July compared with a flat performance last year due to a decision by the company not to repeat two sales events.

The launch of new fall merchandise in July also "did not resonate, as customers remained focused on 'wear now' apparel," Simmons said.

International same-store sales rose 11 percent for the month, compared with a 6 percent dip last year.

In a brief note, Stifel Nicolaus analyst Richard Jaffe, who raised his second-quarter earnings per share estimate for the company, noted that more disciplined inventory management at the company would result in improved merchandise margins.

MURPHY'S MANDATE

Murphy, who most recently served as CEO of Canadian chain Shoppers Drug Mart Corp. (SC.TO), will need to turn around a recent history of sliding same-store sales and declining traffic at the Gap and Old Navy chains amid intense competition. Total same-store sales have fallen or been flat in every month but three since June 2004.

At the Gap chain, the company has begun to reinvigorate its merchandise and concentrate on more classic fashions that appeal to shoppers in their 20s and 30s, rather than to teens.

Gap said it expects to report earnings for the second quarter ended Aug. 4 of 19 to 20 cents a share, excluding items, and said inventory per square foot at the end of the quarter was down in the low-single digits on a percentage basis.

Analysts, on average, had been expecting Gap to earn 13 cents per share, excluding items, according to Reuters Estimates.