Another sign that the turnaround at Gap Inc is underway came yesterday when the US specialty apparel retailer reported a third-quarter profit of $135 million, reversing a year-ago loss of $179 million.

The San Francisco-based company said diluted earnings per share were $0.15, compared with a net loss per share of $0.21 the previous year. Last week Gap forecast earnings of 12 cents to 14 cents per share, which was higher than analysts' estimates.

Net sales for the third quarter increased 9 per cent to $3.6 billion, up from $3.3 billion in the prior year period. Comparable store sales increased 2 per cent, compared with a 17 per cent decrease last year. Same-store sales declined 2 per cent in the Gap domestic division, but was up in all other divisions: Gap International (+2 per cent), Banana Republic (+1 per cent), Old Navy (+6 per cent).

"We're certainly pleased with our earnings for the quarter and the overall progress we're making in each of our divisions," said Gap Inc president and CEO Paul Pressler who joined Gap from Walt Disney Co in September to replace outgoing CEO Mickey Drexler. "Gap, Banana Republic and Old Navy are each moving in the right direction."

Third quarter net sales for Gap Domestic were flat at $1.3 billion; at Gap International sales increased to $420 million, compared with $387 million last year; Banana Republic sales grew to $456 million, compared with $429 million last year; and at Old Navy sales were $1.5 billion, against $1.3 billion last year.

"October performance significantly exceeded our expectations. However, our outlook remains cautious until we see more consistent performance in our business over time," chief financial officer Heidi Kunz said.

The company also said a technology glitch caused by a software upgrade in April 2002 inadvertently caused the system to begin generating accounting reports that understated in-transit inventory levels. As a result, Gap has restated its accounts payable balances for each of the previous three quarters by amounts ranging from $71 million to $248 million.

Heidi Kunz said that for fiscal 2003, Gap expects to open 40 to 60 new store concepts, at 30 to 40 locations. About 60 per cent of the resulting square footage growth is from Old Navy, with the balance spread equally among the other brands.

She added that store closures will be above fiscal 2002 levels, with net square footage expected to decline about 2 per cent for the full 2003 fiscal year.