Cost cutting and tight controls over inventory helped Gap Inc to a 21% jump in fourth quarter profit, but did little to stem sliding sales at the Gap and Old Navy chains.

Net earnings for the 13 weeks to 2 February rose to $265m, or $0.35 per share, from $219m, or $0.27 per share, in the year before period.

Net sales for the quarter fell 4.1% to $4.7bn from $4.9bn last time. Sales at stores open for at least a year dropped 3% compared with a 7% decline in last year's fourth quarter.

"In 2007, the company made the business decisions and changes necessary to deliver improved earnings for our shareholders," said chairman and chief executive officer Glenn Murphy, who joined the company last August.

"While we're aware of the challenging economic environment, our leadership team is committed to delivering the right product to our customers while we bring a sharp operational discipline to our business priorities.

"We'll work tirelessly to reconnect with customers while we continue to improve our earnings results."

The San Francisco-based company has pledged to open fewer stores in 2008 and reduce the size of many existing outlets. It may also cut its advertising budget, and trying to develop "great product" to lure people back to its stores.

By division, fourth quarter same-store sales at both Gap North America and Old Navy
North America - the retailer's two biggest chains - fell by 5%. International sales were down 1% and Banana Republic comps rose by 2%.

Total sales at Gap were down to $1.3bn from $1.5bn, Old Navy sales fell to $1.8bn from $1.9bn, Banana Republic sales dropped to $764m from $766m, and international sales rose to $510m from $497m.

Quarterly sales at the company's online division, Gap Inc Direct, increased to $289m from $252m.

Inventory per square foot decreased 15% year-on-year at the end of the fourth quarter.

For the full year, net earnings rose 7.1% to $833m, or $1.05 a share, from $778m, or $0.93, in the year before. Sales fell 1% to $15.8bn from $15.9bn, and same-store sales slipped 4%.

By division, fiscal same-store sales dropped 5% at Gap North America, 7% at Old Navy
North America, and rose 1% at Banana Republic North America. International sales were down 1%.

Total sales for the year fell to $4.5bn from $4.9bn at Gap, and dropped to $6.2bn from $6.5bn at Old Navy.

Banana Republic sales rose to $2.5bn from $2.4bn, and International sales edged up to $1.6bn from $1.5bn.

The company's online sales for the fiscal year increased 24% to $903m, compared with $730m in the prior year.

Gross margin for the year increased 60 basis points to 36.1% as the company marked down fewer items.

Speaking on a conference call to analysts yesterday (28 February), Murphy said that in 2007 the company "restructured our business and went to more of a brand centric structure.

"We became serious about managing inventory to traffic trends and driving better margins. We refined our target customer and strengthened our product teams.

"And we really began the work of simplifying what, unfortunately, has become a very complicated and bureaucratic culture."

In particular, he has been struggling to reverse sliding sales at the Gap and Old Navy chains. Last week, Dawn Robertson stepped down as president of Old Navy amid, Murphy says, disagreements over how to speed up the product pipeline and integrate marketing.

Looking ahead, the company expects earnings per share of $1.20 to $1.27 for fiscal year 2008. It has also authorised an additional $1bn share repurchase programme.

Murphy wants the company to focus on improving its earnings "with a focus in growing margin dollars."

He says: "We understand the importance of top line growth. We certainly understand the importance of store comps. But in this environment, given where we are in our turnaround, it is the prudent approach to focus on growth in gross margin dollars."

Gap is also proceeding cautiously with capital expenditures, which are expected to total $500m this year, down from $682m in 2007.

The company plans to open 100 stores, mainly abroad, and close 85 locations, most of them Gap stores.

At the close of the quarter it operated 3,131 stores, including 1,532 Gap stores, 1,059 Old Navy stores, and 576 Banana Republic stores.

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