• Q2 earnings little changed at $228m
  • Same-store sales down 8%
  • To focus on "gaining back market share"

Specialty clothing retailer Gap Inc has seen little change in its second quarter earnings, but says that after two years of cost-cutting it now plans to make targeted investments to gain back market share.

The San Francisco based retailer, which this week celebrates its 40th anniversary, on Thursday (20 August) reported second quarter earnings of $228m, or $0.33 per share - marginally lower than last year's $229m, or $0.32 per share.

Sales for the three months to 1 August were $3.25bn, a drop of 7.1% on last year's $3.50bn. Same-store sales were down 8%, less than the 10% decline seen a year ago.

"We're proud to deliver second quarter earnings per share above last year, especially during a challenging environment," said Glenn Murphy, chairman and chief executive officer.

Since the beginning of fiscal 2007, Gap has managed to slash it operating expenses by around $650m, with a drop of $52m in the last quarter alone.

Inventory is down too, and improved merchandise margins have helped lift gross margin by 150 basis points to 39.7%.

"Building upon two years of work improving our economic model, we're now putting further emphasis on changing the trajectory of our top line performance," Murphy added.
 
"Our focus is to find the right balance between maintaining our cost discipline and making appropriate, targeted investments to gain back market share."

INSIGHT

Gap's earnings have an all-too familiar ring about them, reflecting yet another challenging quarter during which shoppers continued to cut spending on its clothes or switched instead to lower priced retailers.

But while two years of inventory and cost cuts might have helped the US' largest specialty apparel retailer to improve margins, sales worryingly continue to fall in all its divisions.

Its best performing unit was Old Navy, which is showing first signs of a recovery even though same-store sales fell 4% in the quarter. That this is seen as encouraging, however, is perhaps a sign of how bad things have got, but does at least mark a significant improvement on last year's drop of 16%.
 
But there is still work to be done at the Gap stores (down 10%) and Banana Republic chain (where same-store sales fell 15%). International sales dropped 5%.

Part of the improvement at the value-focused Old Navy unit is due to remodelled stores, and a new design team headed by Todd Oldham which has breathed new life into its inexpensive, trendy basics.

Gap is also hoping similar efforts will start to pay off at its namesake chain, where designer Patrick Robinson is two years into a re-vamp of the division's clothing lines.

Its latest attempt to boost sales there was unveiled last week in the form of a relaunched upmarket denim line called 1969 Premium Jeans, which features new styling and better fits.

The line has been 18 months in the making, Murphy told analysts. "It's a good first step for Gap to take its number one category and reposition it and do it in  a Gap way to offer great value on a key category."

He added: "Denim is one of those loyalty categories, and people have habits that are deep-rooted, so it takes a while to convince people to change their current buying patterns."

Like most retailers, Gap has focused on reducing costs and inventory to make up for lower sales. Second quarter inventory fell 14% per square foot year-on-year and a high-single digits decline is seen in its third quarter.

But it recognises there is still a lot of work to do to stem its declining sales and ultimately return to profitability.