SAN FRANCISCO Gap Inc (GPS.N) Chief Executive Glenn Murphy said on Thursday that consumer sentiment may deteriorate in the second half of 2011 and was cautious about future sales growth at the apparel retailer.
The company reported quarterly profit that beat analyst forecasts even as comparable, or same-store, sales fell.
Gap has lost about a quarter of its market value this year as investors questioned the company's ability to grow sales after several quarters of losing market share.
Some of the company's merchandise has missed fashion trends, forcing markdowns to move inventory, especially in the main Gap brand stores.
Murphy has shaken up management and is trying to improve marketing and women's apparel. But the CEO's turnaround efforts are being hampered by a stagnant economy.
"There's been a lot of mixed economic news, and there was a bag full of mixed economic news today," Murphy said during a Thursday conference call with analysts.
Europe's sovereign debt crisis is affecting the U.S. stock market and that will probably pressure consumer sentiment in the second half of 2011, the CEO explained.
"Sentiment in the back half relative to the first half will be neutral at best," Murphy said. "It's more likely to be slightly more negative from a sentiment perspective for consumers in the United States."
Gap is targeting positive comparable store sales growth for its full 2011 fiscal year. However, Murphy and Chief Financial Officer Sabrina Simmons were cautious about that goal during the call.
"The comp question is still to be determined because you heard earlier about the environment which we're dealing with," Murphy said.
Simmons described the goal of positive comparable sales growth as "challenging."
Gap's fiscal second-quarter net income was $189 million, or 35 cents a share, compared with $234 million, or 36 cents a share, a year earlier. Net sales rose 2 percent to $3.39 billion. Same-store sales fell 2 percent.
Gap was expected to make 33 cents a share on revenue of $3.34 billion, according to Thomson Reuters I/B/E/S. The company recently forecast fiscal second-quarter profit of 33 to 34 cents a share and already disclosed the 2 percent decline in same-store sales.
Gap shares were little changed at $15.53 in after-hours trading on Thursday after rising when the results first came out.
"The quarter was pretty close to low expectations," said Erika Maschmeyer, an analyst at Robert W. Baird & Co. "They did a good job managing costs which helped.
"Gross profit margin, although down a lot from last year, was slightly better than we expected," she added in an interview with Reuters. "We were modeling 36.7 percent and they came in at 36.9 percent."
Same-store sales at Gap North America fell 3 percent in the quarter, while international same-store sales fell 4 percent. That compares with a 3 percent increase a year ago.
Gap stuck to its previous forecast for fiscal 2011 profit of $1.40 to $1.50 a share.
Maschmeyer was a little surprised Gap did not change its full-year profit forecast because the company has been buying back a lot of stock, which helps boost earnings per share.
"But they haven't had encouraging sales trends and it's still pretty early in the year, so they probably see no reason to set a higher bar for themselves," the analyst added.
(Reporting by Alistair Barr; editing by Robert MacMillan, Andre Grenon and Bernard Orr)