Gap succeeds without markdowns

Gap Inc. is defying the skeptics.

By refusing to join competitors making early-holiday markdowns, the biggest U.S. clothing retailer may post a fourth-quarter profit gain for the first time since 2005.

After two years of declining sales, San Francisco-based Gap has cut inventory at its namesake brand to avoid having to slash prices on $98 cashmere sweaters and $148 tweed coats in what may be the slowest Christmas shopping season in five years.

U.S. mall-based apparel retailers are running an average of 5 percent more discount programs than a year ago, according to estimates by Wachovia Corp. Gap, with a market value about the same on the New York Stock Exchange as in 2004, is focusing on profitable growth while updating its clothes. The strategy will help the stock rise 13 percent in the next year, estimated CL King & Associates analyst Mark Montagna.

"We're making a conscious choice to return to [regular-priced] selling and focus much more on our bottom line than we are top-line growth," said Marka Hansen, 54, the Gap brand president, in an interview this week. "The big, big work for us to do is to continue to develop our product offering so that it's incredibly compelling."

Gap's holiday theme is "Crazy Stripes." The chain has stocked store windows with multicolored scarves and sweaters in magenta, gold and shamrock. The division is selling more full-priced clothes than a year ago and did no promotions the weekend after Thanksgiving, the most important shopping time of the year, Hansen said.

"This is the first year that we've actually seen them go back to this really colorful, crazy-striped campaign that was oh-so-successful in 2002," said Adrienne Tennant, an analyst at Friedman, Billings, Ramsey & Co. in Arlington, Virginia. "It really kind of brings that festive mood to the stores during the holiday season."

Gap shares climbed 47 cents, or 2.3 percent, to $20.90 Wednesday. Before Wednesday, the stock rose 4.8 percent this year, compared with a 15 percent decline in the Standard & Poor's 500 retailing index.

Hansen, who became brand president in February, oversees the company's largest chain by number of stores, with more than 1,200 locations. Gap also operates Old Navy and the more expensive Banana Republic. Sales at stores open at least a year have declined for 13 quarters companywide and for 11 straight at the Gap brand, according to data compiled by Bloomberg.

Under Hansen, Gap has focused on selling casual work and weekend clothing to customers between 24 and 34 instead of to teenagers. Gap currently has "very little 'on sale,'" she said.

There are early signs of a turnaround. November same-store sales climbed 1 percent at Gap North America, the first gain since August. Gap's promotions are down 17 percent from a year ago, Wachovia analyst John Morris said. That's not stopping people from buying, he said on a Dec. 7 visit to the Gap at Westfield Garden State Plaza in Paramus, N.J.

"I can't remember the last Friday in December in the last three years I've seen a full line with people with armloads of goods," at Gap, said New York-based Morris. "Relative to the other mall-based adult stores, they also look significantly less promotional."