Gap's 4Q profit plunges 35 percent

Gap Inc.'s fourth-quarter profit fell 35 percent in a gloomy performance that triggered a recent management purge and doomed the slumping retailer's newest chain. After releasing the results Thursday, the San Francisco-based company warned the upcoming year is likely to bring more turbulence as a new management team tries to stock Gap's stores with more appealing clothes while trimming expenses that had been rising on the expectation of higher sales.

"There are no quick fixes in this business," Gap Chairman Bob Fisher said during a Thursday conference call that represented his first public remarks since he became the company's interim chief executive officer six weeks ago.

Fisher, the son of Gap's founder, replaced Paul Pressler, who stepped down after a dismal holiday shopping season.

Although he didn't identify anyone by names, Fisher seemed to blame Pressler and his top lieutenants for Gap's long-running struggles. Gap recruited Pressler from Walt Disney Co. in September 2002 to engineer a turnaround from an earlier downturn that lasted 2 1/2 years - roughly the same amount of time as the current slump.

"We did not have the right leaders in the right positions," Fisher told analysts. Since Fisher took over, several other Gap executives have followed Pressler out the door.

In an indication that it may take several more months before Gap settles on a permanent CEO, Fisher said the company's board is close to hiring a search firm to sift through possible candidates.

Although he isn't interested in remaining CEO over the long haul, Fisher assured analysts he is committed to kick-starting a turnaround. "It is clear we have a lot of work ahead, but I believe this company still has tremendous potential," he said.

Investors apparently liked Fisher's get-tough approach. Gap shares fell 16 cents Thursday to close at $19.03 on the New York Stock Exchange, then added 19 cents in after-hours trading.

Besides the Gap, the company also owns Old Navy and Banana Republic. Combined, those three chains operate more than 3,100 stores.

Gap launched a 19-store chain called Forth & Towne 18 months ago to cater to older women, but earlier this week said it will close that division as part of its austerity measures.

Once a trendsetter, Gap has been a fashion misfit for most of this decade as it lined its shelves with a mishmash of clothes that seemed to turn off both older and younger generations. "Bottom line, we were not clear about who we were," Fisher acknowledged Thursday.

The missteps weighed heavily on Gap's fourth quarter. The company earned $219 million, or 27 cents per share, for the 14 weeks ended Feb. 3, down from net income of $337 million, or 39 cents per share, in the previous year.

Sales totaled $4.93 billion, a 2 percent increase from $4.82 billion. An extra week in the latest quarter drove the gain.

In a more telling measure of Gap's woes, sales at its stores open for at least a year declined by 7 percent in the fourth quarter. The figure excluded the extra week of business. It marked the 10th consecutive quarter of erosion in Gap's same-store sales, considered the best gauge of a merchant's health.

Partly because management had already lowered expectations so dramatically, Gap's fourth-quarter earnings topped the average estimate of 24 cents per share among analysts polled by Thomson Financial.

But Gap let down analysts with its forecast for this year. The company said its earnings for fiscal 2007 should range between 80 cents and 90 cents per share, excluding projected losses from the Forth & Towne closure. That's below the average analyst estimate of $1 per share, according to Thomson Financial.

With little hope for an upturn any time soon, Fisher said Gap will cut costs more aggressively.

Besides abandoning the Forth & Towne concept, Gap revealed Thursday that it will close a Hebron, Ken. distribution center. The center became expendable because Gap has decided to convert 45 of its Old Navy outlets to regular Old Navy stores by October.

The belt tightening apparently won't affect an online shoe store called Piperlime that Gap unveiled late last year. Piperlime's performance has been "very encouraging" with customer reaction "off the charts," Gap Chief Financial Officer Byron Pollitt told analysts Thursday.

The tough times apparently won't result in Gap being sold any time soon, a possibility that was raised earlier this year amid reports that the company had hired Goldman Sachs to explore "strategic alternatives." Fisher declined to discuss the company's discussions with Goldman Sachs, but emphasized he wants to give a new management team a fair chance to change Gap's direction.