Gap Disappoints Again, This Time With Third-Quarter Shortfall

Everyone did not get in leather.

Gap (GPS) said Wednesday night that fiscal third-quarter earnings will likely fall short of Wall Street's estimates, as it continues to cut prices to move unpopular fall merchandise out of stores. Same-store sales for October, meantime, fell 2%, in line with analysts' expectations.

Gap said third-quarter earnings per share will likely be between 20 cents and 22 cents, less than the 23 cents expected by analysts surveyed by First Call/Thomson Financial. "The key drivers of our results will be a significant decline in gross margin vs. last year and an increase in operating expense as a percent to sales," said CFO Heidi Kunz in a statement. Same-store sales fell 8% for the quarter.

Moreover, Kunz said on a recorded conference call for investors, discounting has continued. "We're carrying a bit more fall residual into the fourth quarter than we would have liked, especially in leather," she said. That will likely mean more price-cutting, she said.

Suffering for Suffrage

The warning is only the latest disappointment for Gap investors. The company has seen sales and earnings suffer since the spring for a host of reasons: fashion that either skewed too young or was simply unappealing (like the colored leather items now on the discount racks at the Gap), an overall slowdown in consumer spending and constant competition in specialty retailing. Its shares are 55% off their 52-week high.

Some analysts had recently called a bottom, but TheStreet.com took a critical look at this newfound enthusiasm for Gap shares and concluded that the company still faced a tough battle to regain its sales momentum.

Gap is scheduled to release third-quarter earnings Nov. 9. At that time it will also give guidance about expansion plans next year, said Kunz. Many analysts would love to see the Gap and other specialty retailers cut back on their ambitious growth plans in light of a slower economy and industry oversupply. A move by Gap to slow planned growth would likely be seen as a positive.

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