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Updated from 4:48 p.m. EST

Roughed-up apparel chain


(GPS) - Get Gap Inc. (The) Report

is shaking things up, but investors don't seem impressed.

The struggling San Francisco-based retailer shuffled the management of its flagship Gap Stores division Tuesday and said it would sell $1 billion worth of convertible bonds next week. Gap also posted a fourth-quarter loss that was in line with analysts' estimates, but the company's other moves will draw far more attention from turnaround-obsessed investors, who are now grappling with liquidity and management-based questions at the company. Unfortunately, few of those questions were even addressed, much less answered, in a postclose conference call.

Gap shares were selling off in after-hours trading, dropping 76 cents to $12.79.

Turning It Around

The company, which runs the Gap, Banana Republic and Old Navy chains, said Marka Hansen, who has worked for Gap for 15 years, will take on the title of executive vice president for Gap Adult. Turning around the core Gap brand -- whose star has fallen over the last couple years due to fashion missteps -- is key for the company to right itself. With the move, Gap split its merchandising functions into men's and women's divisions. Nancy Green, previously responsible for overseeing Gap adult, will now handle the women's division.

"2001 was our most difficult year ever," said Millard Drexler, president and CEO of Gap, in a statement. "But we know what we need to do. We're putting the right teams in place."

For the fourth quarter ended Feb. 2, the company lost 4 cents a share, reversing year-ago earnings of 31 cents. Sales dropped 11% from a year ago, to $4.1 billion; same-store sales plunged 16% from the year earlier.

Those numbers are largely beside the point, however. Investors are looking for some assurance that the company can engineer a turnaround.

But the company gave no earnings or sales guidance, instead talking up vague plans for a turnaround in the second half of the year. That is likely not enough to assure investors, as it is the same tune that most retailers sang last year as the recession began denting sales. That turnaround, of course, never came.

"I wish I could tell you that our problems were over," said Millard Drexler, Gap's chief executive. "While we still have a lot to do, we have made progress."

But when that progress will translate to better sales is still not clear. The only hard number available -- that February comparable store sales are down 17%, below plan -- does not bode well.

"What I was looking for going in was a little direction on how spring is going, but with a negative 17% comp through Monday, it doesn't look good," says Jeff Klinefelter, an analyst at U.S. Bancorp Piper Jaffray. "With no guidance for even Q1, there is no visibility on the business." (He rates Gap a market underperform and his firm does not have a banking relationship with the company.)

A hefty portion of the call was devoted to talk on returning to basics, such as khakis, which the company has been saying for some time on earnings calls and at investor conferences. "We want to own khakis once again," Drexler said. "We are turning around our business by getting back to what we do best."

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Health Nuts

The health of the San Francisco-based company has been

deteriorating for nearly two years. Once a highflying growth company, Gap hasn't reported an increase in same-store sales in 21 months. Critics says the company has abandoned its roots as a seller of basics -- khakis, jeans, T-shirts -- in favor of jazzier attire, an effort that failed to win over consumers.

At the same time, the company simply operates too many stores, some say. Indeed, last year, as sales slowed markedly, the company opened 600 new stores, bringing its total to about 4,150. Gap has scaled back expansion plans for 2002, but on Tuesday said it still expects to open between 170 and 190 new stores.

Meanwhile, the company's balance sheet is starting to look shaky. The two major credit rating agencies recently

slashed Gap's rating to junk status. The move, which affects some $2.6 billion in debt, makes it more expensive for Gap to borrow money. The downgrade followed Gap's announcement that it had lined up a two-year, $1.3 billion secured bank facility. That type of financing is normally reserved for financially weaker companies whose bonds don't earn an investment-grade rating.

The stock is off over 61% from its 52-week high -- yet despite all the problems, it still trades at a premium to peers with brighter prospects, notes Emme Kozloff, an analyst at Sanford Bernstein, in a recent research note. At about 32 times forward earnings, Gap trades at a higher multiple than

Abercrombie & Fitch

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American Eagle Outfitters



Limited Too

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, among others. The stock closed Tuesday up 72 cents at $13.63.

Most on Wall Street regard 2002 as a make-or-break year for Gap. If sales keep plunging the way they have in recent months, then the company's overhead -- operating all those stores, paying all those workers, servicing all that debt -- could become such a burden that Gap will need to seriously rethink what it's doing, and either sell businesses, close stores or both.