Gap’s Profit Forecast for Holiday Quarter Falls Short

Gap Inc. (GPS), the biggest U.S. specialty-apparel retailer, maintained an annual profit forecast range signaling that the crucial holiday-shopping quarter may fall short of analysts’ estimates.

The company reaffirmed its full-year earnings estimates of $2.57 to $2.65 a share. That range, excluding results from the first three quarters, implies fourth-quarter profit of 50 cents to 58 cents, trailing analysts’ estimates of 69 cents.

Chief Executive Officer Glenn Murphy is working to boost holiday sales with lower-priced and on-trend products as apparel retailers increase discounts. Consumers also are shifting their spending to durable goods such as cars and appliances. Sales for the third quarter rose 2.9 percent to $3.98 billion, meeting analysts’ average estimate.

“Expectations were so far ahead of what’s possible to execute against,” said Stephanie Wissink, a Minneapolis-based analyst at Piper Jaffray Cos., in a phone interview yesterday after the results. “They’re being conservative, because they should be, but it’s also a mindset of reasonability. The cycle of beating and raising projections is starting to wane.” She has a neutral rating on the shares, the equivalent of hold.

Net income for the quarter ended Nov. 2 rose 9.4 percent to $337 million, or 72 cents per share.

Gap fell 1.3 percent to $41.31 at the close in New York. The shares have gained 33 percent this year.

Same-Store Sales

Gap said same-store sales rose 1 percent in the third quarter, compared with a 6 percent gain a year earlier. Murphy said on a conference call that Gap’s product assortment wasn’t as strong in the third quarter as last year’s colored denim trend that drove sales.

Sales at Banana Republic stores open at least a year fell 1 percent in the third quarter, while the Gap brand gained 1 percent and Old Navy sales were flat.

Murphy said he expects retailers will continue to discount heavily through the holiday season.

“There’s a little bit of fatigue out there when it comes to consumers,” Murphy said on the earnings call. “So the question is are we disappointed in consumer sentiment, or have we as an industry not been that innovative to give the consumer product that doesn’t look like wallpaper day in and day out.”

To contact the reporter on this story: Lindsey Rupp in New York at lrupp2@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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