Holiday sales not so merry for Gap


Published: Friday, January 5, 2007 at 6:01 a.m.
Last Modified: Thursday, January 4, 2007 at 12:00 a.m.

SAN FRANCISCO — Gap Inc. suffered through a miserable holiday shopping season that will decimate its fourth-quarter profit, raising investor hopes for a management shake-up or an opportunistic bid to buy the long-slumping retailer.

The latest letdown, delivered Thursday as part of Gap's monthly update, caps a year of broken promises for the company and its beleaguered chief executive, Paul Pressler.

Based on the projections released by the company, Gap's earnings for its fiscal year ending later this month will range from 83 cents to 87 cents per share. The anticipated profit is about $300 million, or 40 cents per share, below the target that Pressler set at 2006's outset.

Investors appeared to be betting that Gap's poor performance in the pivotal holiday shopping season would prod the company's board to either oust Pressler after nearly three years of eroding sales or perhaps become more receptive to overtures from deep-pocketed buyout firms confident that they could engineer a turnaround.

Gap shares rose 16 cents to $19.47 in late afternoon trading on the New York Stock Exchange.

"This was a big disappointment, so people are now expecting a change at the top," said Pacific Growth Equities analyst Christine Chen.

Other analysts have theorized that a deep-pocketed private equity firm might be willing to buy Gap for about $20 billion, or $24 to $25 per share, and then bring in new management to tackle the problems that Pressler and his team so far have been unable to address.

Gap remains an appealing takeover target because it generates lots of cash and retains a well-known brand backed by a retailing network spanning nearly 3,200 stores. Besides the Gap chain, the company also owns Old Navy, Banana Republic and Forth & Towne.

Any takeover attempt would likely have to win the backing of Gap co-founder Donald Fisher, the patriarch of a family that controls more than 25 percent of the company's stock. Although he is approaching 80 years old, Fisher hasn't given any inkling he is interested in relinquishing control of the company that he started 38 years ago.

For his part, Pressler once again tried to assure investors that he intends to fix the troubles plaguing the company's two biggest chains, Gap and Old Navy.

The declining customer traffic at those two chains are hurting the company's "same-store" sales — a key measure of a merchant's health. Gap's same-store sales dropped by 8 percent in December, extending a trend that has been bedeviling the company since spring 2004.

Pressler brought in new management teams at both the Gap and Old Navy chains last year, but he acknowledged those changes apparently weren't enough.

"Given that we did not gain the traction that we had expected, the management team, with the active involvement of our board of directors, is currently reviewing Gap's and Old Navy's brand strategies," Pressler said in a statement. "We are committed to making the necessary changes to improve performance."

It's not the first time Pressler has made that kind of pledge.

Coming off a lackluster 2005, Pressler vowed to turn things around in 2006 and projected earnings in the same range as the previous year.

Instead, Gap's deterioration worsened as the year progressed, prompting Pressler to lower his earnings guidance three times in the past five months.

With Thursday's revision, Gap now expects to earn 17 cents to 21 cents per share in its fiscal fourth quarter, well below the average estimate of 33 cents per share among analysts surveyed by Thomson Financial.

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