Feb. 28 (Bloomberg) -- Gap Inc., the largest U.S. clothing retailer, said fourth-quarter profit rose for the first time in three years and forecast further gains this year after it sold more full-priced sweaters and jeans during the holiday season.

Gap rose 5.7 percent after the close of New York trading. The San Francisco-based owner of the Banana Republic and Old Navy chains said it plans to buy back $1 billion of stock.

Net income climbed 21 percent to $265 million, or 35 cents a share, Gap said today in a statement. Profit met the average estimate of analysts. Revenue in the three months through Feb. 2 dropped 5 percent to $4.68 billion

Sales at stores open at least a year fell 3 percent. The retailer, under Chief Executive Officer Glenn Murphy, reduced inventory and introduced the ``Crazy Stripes'' line at Gap, limiting markdowns. He said in 2008 Gap plans to cut costs, hold back on new North American store openings and increase the retailer's margins after three years of falling revenue.

``Gap is turning around, getting a fashion point of view and controlling their inventory,'' Marie Driscoll, a Standard & Poor's analyst in New York, said today in a Bloomberg Television interview. She recommends holding Gap.

The retailer forecast profit of $1.20 to $1.27 a share for the year ending in early 2009. The average estimate of 17 analysts surveyed by Bloomberg was for profit of $1.23 a share. The company earned $1.05 a share last year.

Gap said its board authorized the new stock buyback after completing a $1.5 billion repurchase program in the fourth quarter. About $158 million, or 16 percent, of the $1 billion will be purchased from members of the founding Fisher family.

Stock Rises

Gap, known for its casual T-shirts and khaki pants, climbed $1.12, or 5.7 percent, to $20.60 as of 6:13 p.m. in trading after the close of New York markets. It fell 42 cents, or 2.1 percent, to $19.45 at 4 p.m. in New York Stock Exchange composite trading. The stock gained 15 percent since Murphy was hired as CEO on July 26.

``Investors are getting comfortable that the new CEO has better control and understanding of the company,'' said Jordan Posner, who helps manage $1.6 billion, including about 1 million Gap shares, at Matrix Asset Advisors Inc. in New York.

Same-store sales declined 5 percent each at Gap's North American stores and at Old Navy, the largest chain by revenue. Comparable-store sales climbed 2 percent at Banana Republic, whose clothes are the most expensive of the divisions.

``We understand the importance of top-line growth,'' Murphy said during a conference call with investors and analysts. ``We certainly understand the importance of store comps. But in this environment, given where we are in our turnaround, it is the prudent approach to focus on growth in gross margin dollars.''

Projections by Analysts

Analysts estimated fourth-quarter earnings of 35 cents a share, the average of 18 projections in a Bloomberg survey. Gap said earlier this month that profit rose to 33 cents to 35 cents a share, including a tax benefit of 1 cent.

Gap earned $219 million, or 27 cents, in the fourth quarter a year earlier. It operates 3,167 stores.

The retailer raised its annual dividend by 6.3 percent to 34 cents a share from 32 cents.

Gross margin, or profit left after subtracting the cost of goods, widened to 34.8 percent of sales from 32.6 percent a year earlier. Gap is ``focused on delivering our earnings through more regular-priced selling and healthy markdown margins,'' Chief Financial Officer Sabrina Simmons said on the call.

Inventory Reduction

The company reduced inventory per square foot by 15 percent from a year earlier. Inventory at the end of the first quarter probably will decrease by a percentage in the ``low teens,'' Gap said.

Gap named Murphy to replace Paul Pressler, who resigned in January 2007. Murphy, 45, led Shoppers Drug Mart Corp., Canada's biggest pharmacy chain, for six years before stepping down in March. Sales at the Toronto-based chain doubled during Murphy's tenure.

Gap has appointed new heads and designers for its brands. In September, the retailer hired Todd Oldham as chief designer for the Old Navy unit. Oldham has appeared on MTV's ``House of Style'' show and previously designed a line of dorm-room furnishings for Target Corp. Simon Kneen, who worked for Brooks Brothers, was named Banana Republic's top designer last month.

The retailer said Feb. 19 that Old Navy president Dawn Robertson left the company. A ``philosophical difference'' was the reason for the ``mutual decision'' for Robertson to leave, Murphy said today.

The retailer was founded in 1969 by Donald Fisher and his wife, Doris. Robert Fisher, their son, served as interim CEO last year before Murphy was hired.

To contact the reporter on this story: Heather Burke in New York at hburke2@bloomberg.net.

Last Updated: February 28, 2008 20:22 EST