Embattled Gap Warns of Loss as November Sales Fall 25 Percent

SAN FRANCISCO – Gap Inc., the largest U.S. clothing chain which has been battling slow sales for months, warned of a fourth-quarter loss on Thursday, right after reporting that sales at its stores open at least a year fell a whopping 25 percent in November.

Less than a month after posting its first quarterly loss in more than a decade, Gap, which runs Old Navy, Gap and Banana Republic, said its fourth-quarter loss could be ``considerably worse'' than the 6 cent per share loss posted in its third quarter.

Shares of Gap fell more than 6 percent in early trade on Thursday, before paring losses to trade down 3 cents or 0.2 percent, at $13.55 on the New York Stock Exchange. Gap's stock value has been more than cut in half in the past year.

``Our price target is $10.50, but Gap could be a single-digit stock in the near future,'' Lazard LLC retail analyst Todd Slater said in a note early on Thursday.

``We will need to reduce earnings per share estimates meaningfully,'' Slater said. On Oct. 26, Slater had lowered his investment rating on Gap shares to ``sell.''

The profit warning from San Francisco-based Gap was just the latest in a spate of bad news from the retailer, which for at least two years has battled a myriad of internal woes, including possible over-saturation of its U.S. store base and definite fashion problems at all three of its store divisions.

Retailers like Gap have also been hit hard by the U.S. recession, which has driven shoppers to seek out bargains at discounters rather than shop at higher-priced department and specialty stores.

November's 25 percent drop in same-store sales was Gap's steepest in 12 months of straight declines in sales at stores open at least one year.

In recent weeks, industry experts have debated what Gap needs to do to turn its business around. Some say Gap needs to slow store growth and close underperforming stores, while others say Gap's problem lies in its fashion choices.

Gap recently lowered its store growth rate to about 5 percent for the next fiscal year and said it was not committing to any new leases. In addition, Gap recently hired Jerome Jessup to head design, although his imprint is not likely to take hold until Gap's spring fashions hit the stores.

Either way, the retailer's attempts toward a meaningful recovery are not expected to take hold any time soon.

``Looking at the remainder of the fourth quarter, it is reasonable to expect that current negative trends in comparable store sales and gross margins could continue,'' Gap's Chief Financial Officer Heidi Kunz said in a recorded call.

``On that basis, fourth-quarter earnings per share could be considerably worse than the 6-cent loss reported in our third quarter, excluding a tax-related charge,'' Kunz said.

The 30 Wall Street analysts polled by research firm Thomson Financial/First Call on average have expected the retailer to post a profit of 8 cents a share, with estimates ranging from a loss of 5 cents a share to a profit of 15 cents a share.

Kunz said November sales results were driven by dismal performance at both Gap and Old Navy stores and at the expense of margins, which were driven down by increased markdowns.

The retailer also said it held its ``family'' sales day on Sunday this year, and for the first time in history added ''friends'' to that mix.

``While we were pleased with the positive comps achieved that day, results on Monday fell back in line with trends seen in November,'' Kunz said, adding that it plans to host additional ``friends and family'' sales events at Gap and Old Navy in weeks to come.

Currently, the retailer is offering registered Gap.com members 30 percent off full-priced merchandise and 15 percent off sale items at its stores this weekend.

Total sales for the four weeks ended Dec. 1 fell to $1.2 billion from $1.4 billion last year.

The retailer said same-store sales at its Gap domestic stores fell in the mid-20s on a percentage basis, while sales at Old Navy stores open at least a year fell in the low-30s on a percentage basis. Banana Republic same-store sales fell in the low double digits on a percentage basis, the company said.

As of Dec. 1, Gap operated 4,176 stores, up 15 percent from this time last year.