Gap Meets Lowered Expectations; Kmart Disappoints

Updated from 10:58 a.m. EST

Gap ( GPS) acknowledged Thursday that its third-quarter profits sank 41%, meeting analysts' lowered estimates, yet the slumping clothing retailer pledged to "fix its problems" and make management changes after a string of earnings warnings.

At the same time, the retail giant Kmart ( KM) disappointed Wall Street on Thursday with a third-quarter loss of $67 million, or 14 cents a share, compared with a profit of $27 million, or 5 cents a share, a year earlier. Analysts polled by First Call/Thomson Financial had expected a loss of 10 cents a share.

Gap, the San Francisco-based parent of Old Navy and Banana Republic, reported earnings of $186 million, or 21 cents a share, down from $315 million, or 35 cents a share, in the comparable quarter of last year. Analysts had anticipated earnings of 21 cents a share after Gap said earlier this month that it likely would miss its profit target.

Gap, which like other retailers across the country is struggling to offset the harsh effects of a slower economy, said sales climbed 12% to $3.4 billion in the quarter. Gap finished Thursday regular trading down $1.63, 6%, at $24.63.

Troy, Mich.-based Kmart said inventory liquidation cut into its regular sales during the quarter. The company posted overall sales of $8.2 billion, a 3% increase from $7.96 billion a year ago.

"We are building momentum," Chuck Conaway, Kmart's chairman and chief executive, said in a statement, "even though the average retail selling price declined 1.2%" in the latest quarter.

Shares of Kmart ended down 13 cents or 2%, at $5.81.

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