Gap Inc. is defying the skeptics.
By refusing to join competitors making holiday markdowns, the biggest U.S. clothing retailer may post a fourth-quarter profit increase - compared with a 35 percent drop a year ago.
The nationwide retailer, based in San Francisco, has cut inventory at its namesake brand to avoid having to slash prices on $98 cashmere sweaters and $148 tweed coats.
Fearing slow holiday sales, retailers that are based in shopping malls are running an average of 5 percent more discount programs than a year ago, according to estimates by Wachovia Corp. But Gap is focusing on profitable growth while updating its clothes. The strategy could help the company's stock price rise an estimated 13 percent in the next year, CL King & Associates analyst Mark Montagna forecast.
"We're making a conscious choice to return to reg-priced selling and focus much more on our bottom line than we are top-line growth," Marka Hansen, the Gap brand president, said in an interview. "The big, big work for us to do is to continue to develop our product offering so that it's incredibly compelling."
In the eight-county Philadelphia area, there are 37 Gap stores, including maternity and children's locations.
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.
The stripes line is "the most universally appealing key item that they've had for the past few years," said Adrienne Tennant, an analyst at Friedman, Billings, Ramsey Group in Arlington, Va. "It offers color; it's very festive in nature."
Shares of Gap lost 23 cents yesterday to close at $21.18 in New York Stock Exchange trading. The stock is up 8.6 percent this year, compared with a 6 percent decline in the Standard & Poor's 500 apparel 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. The company also operates Old Navy and the more expensive Banana Republic stores.
Sales at all company stores open at least a year have declined for 13 consecutive quarters 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 ages 24 and 34 instead of aiming at 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. Gap's promotions are currently 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.
Interestingly, Gap's store traffic - the number of customers - fell 7 percent in November. So the retailer may be shedding customers who only came in searching for clearance items, CL King's Montagna said.
"There are still a number of people who kind of are skeptical of this huge chain being able to reconnect with the customer," said Tennant, the Friedman Billings analyst.
But she added that Gap "has such great brand awareness in the United States and abroad that I think, when the merchandise is right, it won't be as difficult as people think to kind of get that customer across the threshold again."