Down-and-out Gap ( GPS) keeps stalling. The apparel giant reported earnings a penny above the guidance it gave just a week ago but was cautious in its sales outlook. This should be particularly troublesome for investors, as the second half of this year has been pegged as make-or-break by many observers, who say the company needs to get sales cranking soon. The Gap has been in a downward spiral for more than two years, and while earnings of late have been a pleasant surprise, sales are still disappointing. On Thursday the company said that overall sales for the second quarter were up just 1%, to $3.3 billion, while same-store sales in the quarter declined 7%. Sales per square foot also dropped, from $91 last year to $86 in the second quarter. More important, while the company did not give updated earnings guidance, it did say that, thus far, August sales are off, forcing more markdowns. "So far this month, we have not seen an improvement in the traffic trends that we and other retailers began seeing in the second half of July," said CFO Heidi Kunz, in a statement. "The retail environment also continues to be very promotional. As a result, our beginning-of-month sales are somewhat short of projections. But each brand is responding aggressively in the second half of the month, with strategic promotional events and marketing to drive the business."
San Francisco-based Gap, which operates The Gap, Old Navy and Banana Republic chains, reported earnings of 6 cents per share, compared with 10 cents a share in the year-ago period. On Aug. 8, the company updated its earnings guidance, saying it expected earnings between 4 cents and 5 cents per share. At the time, analysts expected the company to earn 3 cents per share, according to Thomson Financial/First Call. The company faces several Gap-specific problems, as well as a shaky consumer economy. And while the company took several small steps toward a turnaround this year -- it unexpectedly turned a profit in the first quarter, and monthly same-store sales declines have moderated slightly -- it still has a long road ahead. It has a lame-duck CEO and still must prove it can get its fashion right. It also has mountains of debt and, with its bonds rated junk, little access to the capital markets. For this reason, some say the company must show a turn in sales in the second half to avoid a radical restructuring, which could include shuttering stores or even spinning off one of the three divisions. Gap shares, off about 6.5% on the year, closed up Thursday 54 cents, at $13.