Updated from 5:20 p.m. EDT


(GPS) - Get Report

reported another profit slump Thursday and cut its full-year earnings forecast as continued sales declines left its long-awaited turnaround nowhere in sight.

The specialty-apparel empire said it earned $128 million, or 15 cents a share, for the second quarter, down from the $272 million, or 30 cents a share, it logged in the same quarter last year. The results beat analysts' average expectation by a penny a share, according to Thomson First Call.

But the company slashed its profit forecast for the rest of the year to $1.08 to $1.12 a share, casting doubt on its plans to stage a comeback in the latter half of 2006. The company's previous projection called for earnings of $1.23 to $1.27 a share.

After a long string of declining same-store sales, Gap had pinned investors' hopes for a turnaround on a merchandise makeover it planned to put in place this summer. The company predicated its previous guidance on the belief that its "efforts to improve performance would begin to gain traction during the second quarter and build momentum with fall product flows."

That didn't happen. With the back-to-school selling season under way and the all-important holiday season approaching, Gap's prospects look bleak, particularly as concerns about a slowdown in consumer spending have taken a toll on Wall Street's expectations. With interest rates rising, gas prices high and the housing market slowing, the market has speculated that Gap CEO Paul Pressler may find his job in jeopardy, and that private equity firms could be viewing the struggling conglomerate as a buying opportunity.

On a conference call with analysts, Gap Chief Financial Officer Byron Pollitt said sales so far in August are trending below the company's expectations. He said Gap's new earnings outlook is predicated on a "very modest" improvement in sales trends in the rest of the third quarter and the fourth quarter as the company rolls out an aggressive marketing effort.

Gap's total sales for the second quarter were flat compared to last year at $3.7 billion, but the company's same-store sales, which measure sales at stores that have been open for at least a year, dropped 5% from last year.

Gap North America reported a 6% decline in same-store sales, or comps, while Banana Republic posted a 1% drop. Old Navy saw a 5% drop, and comps at its international stores were down 11%.

The retailer's profit margins were lower in the quarter as it cut prices to clear out excess inventory.

"The second quarter continued to be challenging, as we aggressively cleared inventory to prepare for fall merchandise, and we invested in marketing and stores to improve second half performance," said Gap in a press release.

Its shares recently were down 58 cents, or 3.4%, to $16.72 in after-hours trading. The shares closed the regular session down 0.5%.