Gap expected to post 3Q profit increase

Associated Press

NEW YORK (AP) — Gap Inc.'s third-quarter results are expected show further signs of a turnaround in its business. The San Francisco-based operator of Banana Republic, Gap, Old Navy and Athleta chains is due to report Thursday after the close of trading on Wall Street.

WHAT TO WATCH FOR: Investors will want to know more details about what shoppers are buying and how Gap's moves to improve its fashions are working. They'll also want to get details on the company's merchandising and discounting strategies for the holiday season. It's key that Gap keeps the momentum going heading into most important season of the year, which accounts for as much as 40 percent of retailers' annual revenue.

The company has struggled for years to reclaim its former fashion status. But its recent performance indicates that it's beginning to find its fashion groove and draw more people to its stores. It has stepped up its marketing and pushed trendy clothing like brightly colored jeans.

Gap overhauled its management team last month in a move aimed at enabling the retailer to respond more quickly to customers' needs across the globe. The changes will put the North American, international, online, outlet and franchise divisions under a single global executive for each of the company's brands. It will also form a new innovation and digital strategy team to further advance its efforts in that area.

The changes, which take effect in February, build upon the shifts made in 2011 that brought together its specialty and outlet divisions and established the Gap Global Creative Center in New York.

Gap has made also brought in new executives. The company just tapped Rebekka Bay as creative director and executive vice president for global design. Bay, who developed and launched the COS brand at the Swedish fast-fashion retail chain H&M, will be responsible for products sold online and in the nearly 1,600 stores in 42 countries in which Gap's namesake brand operates. She fills the spot vacated by Patrick Robinson who was ousted in May 2011. He had been design director for the Gap chain.

Meanwhile, Gap has been expanding in other countries as it pares back its fleet of U.S. Gap stores by 34 percent by the end of 2013, compared with 2007, not including Gap Outlets. That will leave 700 Gap stores. The company plans to maintain its Old Navy stores in North America but make them smaller.

A key sales figure rose 4 percent in October, when analysts expected a 5 percent increase. But the retailer issued a third-quarter profit outlook that topped Wall Street's view.

For the third quarter, which runs from August through October, sales at stores open at least a year rose 6 percent. This figure is a key indicator of a retailer's health because it excludes results from stores recently opened or closed, which can skew business trends.

The biggest sales improvement was at Old Navy, which posted a 9 percent gain in the metric. Overseas sales at stores open at least a year fell 3 percent, the weakest performance.

WHY IT MATTERS: Gap is the nation's largest mall-based clothing chain, so its results provide insight into shoppers' willingness to spend.

WHAT'S EXPECTED: Analysts are expecting earnings of 62 cents per share on revenue of $3.84 billion, according to FactSet.

LAST YEAR'S QUARTER: The company earned 38 cents per share on revenue of $3.59 billion.

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