Gap Looks to Heal Wounds

Earnings drop but top expectations, and the retailer vows that results will start to improve.
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Updated from 5:21 p.m. EDT

With more hemorrhaging from its top and bottom lines in the first quarter,

Gap

(GPS) - Get Report

is betting that a makeover in the works will win back customers and rejuvenate the reeling company.

The San Francisco-based specialty retail empire said late Thursday that it earned $242 million, or 28 cents a share, for the first quarter, down from the $291 million, or 31 cents a share, it recorded for the same period last year. Analysts, on average, were expecting earnings of 27 cents a share, according to Thomson First Call.

"During the first quarter, we made progress in each of our brands to improve the product and store experience," said Gap in a statement. "We remain confident in the strategies underway to turn around our business performance and look forward to seeing the progress reflected in our financial results in the second half of the year."

The company stood by its previously issued earnings guidance for the year, which calls for a profit of $1.23 to $1.27 a share. Analysts forecast annual earnings of $1.24 a share.

The company's shares were recently up 51 cents, or 2.8%, to $18.43 in after-hours trading.

Gap's total first-quarter sales dropped 5% to $3.44 billion on a same-store sales decline of 9%. The continued deterioration in the company's same-store sales, or comps, comes on top of a 4% decrease in the same period last year, suggesting that the retailer's market share losses are accelerating.

On a conference call following the release, Gap CEO Paul Pressler said he expects the retailer's comps to turn modestly positive in the second half of the year. The company's management team outlined a series of new fashions, marketing efforts and store remodels it has underway across its different concepts.

"Most of these elements are going to come to together to drive improvements in our performance for the second half," Pressler said.

The company has its work cut out for it. In its North America division, Gap Stores recorded a 8% decline in comps, while Banana Republic saw a 5% drop and Old Navy stores were down 11%. Its international division logged a 11% same-store sales decline..

Gap's gross margin for the quarter decline 60 basis points to 40.2%, while its operating margin was 10.8%. It expects operating margins of 10% to 10.5% for the year.

During the quarter, Gap opened 38 store locations and closed 21. In 2006, it expects to open about 175 stores, weighted toward its Old Navy brand. It will close about 135 locations, mostly Gap stores.

"It is our belief that with consistently improved product, together with the effect of our improving store experience and cumulative marketing efforts, we will see a positive momentum shift in top line results in the second half of the year," said Gap's chief financial officer, Byron Pollitt.