Updated from 5:09 p.m. EST

Gap

(GPS) - Get Report

hit its third-quarter earnings targets, allaying some concerns that the clothing retailer's turnaround had drifted off course.

The company posted a 1% rise in profit, with net income of $265 million, or 28 cents a share, matching Wall Street's consensus estimate, according to Thomson First Call. It earned $263 million, or 28 cents a share, in the same quarter last year.

The latest-quarter results include about $10 million of expenses related to premiums paid on the early retirement of $122 million of debt in the quarter.

"We're pleased with our strong year-to-date earnings," said the company in a press release. "As we head into the fourth quarter, we are well positioned for the holidays."

In a conference call with analysts, Gap CEO Paul Pressler said the company got off to a rocky start in the quarter due to an "increasingly promotional atmosphere" in fashion. Sales volume improved later in the quarter, and he sees promising signs going into the holiday season.

"Given the tough environment, we're pleased with the early reads we got in October on our holiday assortment," Pressler said.

A trend of negative monthly sales figures began for Gap in June, disrupting what had looked to be a stellar turnaround run for Pressler since he joined the company two years ago in the midst of a major slump. This holiday season is expected to be critical for the company on Wall Street, as analysts look for signs that it can sustain Pressler's revival.

Gap declined to give specific earnings guidance for the fourth quarter. Analysts' estimates call for earnings of 44 cents a share.

Gap's sales rose 1% to $4 billion, while same-store sales, or sales at stores open at least a year, dropped 1% for the quarter compared to last year's gain of 6%. Comps were dragged lower by particular weakness in the company's overseas Gap stores, which notched a 10% decline. Domestic same-store sales at Gap stores rose 2%, while Banana Republic's added 3% and Old Navy's dipped 1%.

Disciplined inventory and fleet management helped drive a 50-basis-point improvement in gross margin over the prior year, Gap said, and it ended the quarter with $1.9 billion more in cash and short-term investments than debt.

It also announced a $750 million share repurchase plan. Through Oct. 30, the company has repurchased about 17 million shares for $338 million.

Separately, Gap said that it will open three new Banana Republic stores in Tokyo by fall 2005, with more stores opening in early 2006. There already are 75 Gap stores in major Japanese cities, including Tokyo, Osaka and Kobe.

"The Japanese have an affinity for American sensibilities and fashion, and we believe it offers us an excellent long-term growth prospect," Pressler said.

Shares of Gap ended the day down 2 percent, or 46 cents, at $22.54. In after-hours trading, the stock was recently up 17 cents, or 0.7%, to $22.71.