Gap's Profit Increases 25%

By ELIZABETH HOLMES A number of mall-based retailers are improving their profit margins even as the tough sales environment of the recession lingers through the fall. Retailers' yearlong efforts to cut costs and reduce inventory, as well as avoid deep markdowns, have paid off in recent months. On Thursday, Gap Inc., along with Buckle Inc. and Williams-Sonoma Inc., reported increased profits, or profit after a year-earlier loss, on stronger gross margins for their fiscal third quarters. Still, the question mark hovering over the holiday season--how deeply consumers will reach into their pockets-has retailers focused on how to coax more shoppers into their stores. "This is the new normal that we are facing right now with customers, and I think we have to stay close to them," said Gap Chief Executive Glenn Murphy on a conference call with analysts. "We built good contingency plans to make sure we react to the consumer." Profit at Gap Inc., one of the world's largest apparel retailers by sales, rose 25% to $307 million, or 44 cents per share, for the quarter ended Oct. 31, from $246 million, or 35 cents per share, a year earlier. Sales at stores open at least a year, known as same-store sales, were flat compared to last year. The company, which also operates Old Navy and Banana Republic, reported that gross margin increased 3.8 percentage points to 42.5%, its highest in a decade. Mr. Murphy said Gap Inc. continues to work with its vendors to squeeze costs out of the supply chain so it can offer more traffic-driving promotions without hurting margins. Denim retailer Buckle reported an increase of 14% in net income to $33.3 million, or 71 cents a share, compared to $29.1 million, or 62 cents per share, a year ago. Same-store sales rose 4.3% for the quarter ended Oct. 31. Reduced markdowns and strong sales of full-priced merchandise led to improved merchandise and gross margin, said Karen Rhoads, chief financial officer, on a call with analysts. The average price for women's denim rose to $92.40 during the quarter, up from $85.60 a year earlier. Williams-Sonoma, which also operates the Pottery Barn and West Elm brands, swung to a profit of $7.3 million, or 7 cents a share, for the quarter ended Nov. 1. That compares to a net loss of $11 million, or 10 cents a share, last year. The seller of home goods, which has been one of retail's hardest-hit areas in the economic downturn, reported that same-store sales rose 1.7%, driven by a 7.6% increase in the Pottery Barn brand, the first year-over-year quarterly increase for the company in eight quarters. Williams-Sonoma saw gross margin rise to 35% for the quarter, up from 32% a year earlier. Other retailers were able to offer promotions while maintaining margins. Children's Place reported flat gross margin for its fiscal third quarter. The bargain-priced children's apparel retailer reported a 36% rise in net income to $37.8 million, or $1.37 per share, for the quarter ended Oct. 31, from $24.1 million, or 81 cents per share, a year earlier. The profit came despite a 2% decrease in same-store sales. Interim Chief Executive Chuck Crovitz attributed them to careful cost cutting and management of inventory levels. Write to Elizabeth holmes at elizabeth.holmes@wsj.com