Gap Inc on Thursday posted a 19 percent rise in quarterly earnings despite sluggish sales at stores open more than a year, helped by cost-cutting, and announced plans for a $1.5 billion share buyback program.

The U.S. apparel retailer also raised its full-year profit outlook, and its stock rose 1 percent in after-hours trade.

I'm very supportive of our near-term priorities which are first and foremost getting our North American Gap business and Old Navy business back on track, said newly appointed Chairman and Chief Executive Glenn Murphy, speaking publicly for the first time in his new job on a conference call with analysts.

He is striving to reverse a multiyear sales slump that has affected Gap and Old Navy, laying off workers to cut costs, reducing inventory at stores and scaling back corporate office space. The company says it has begun to improve merchandise and is now more carefully targeting consumers in their 20s.

Second-quarter net income was $152 million, or 19 cents per share, compared with $128 million, or 15 cents per share, a year earlier. Sales fell 1 percent to $3.69 billion.

Adjusted earnings of 21 cents per share -- excluding cost reduction initiatives -- topped a Wall Street analyst average of 19 cents, according to Reuters Estimates.

Same-store sales fell 5 percent overall, down 6 percent at the Gap chain and 9 percent lower at Old Navy. Yet same-store sales were up 4 percent at Banana Republic North America.

For fiscal 2007, Gap raised its adjusted earnings outlook to a range of 90 cents to 95 cents from 80 cents to 90 cents before. The outlook, excluding expenses associated with closing the Forth & Towne chain and cost-cutting efforts, is in line with the average analyst estimate of 93 cents.

Gap's new $1.5 billion share repurchase program will include about $250 million in shares bought from members of the Fisher family, which owns some 17 percent of outstanding Gap shares. Board member Bob Fisher, son of founder Donald, served as interim CEO before Murphy was named last month.

C.L. King analyst Mark Montagna said the new program and completion of an earlier buyback were both positive surprises.

It shows the company is confident they've turned the corner at this point. It also reflects on the strength of the balance sheet -- they do have a strong balance sheet, he said.

Gross profit margins rose to 34.3 percent in the quarter, up 1.3 points on the prior-year period, partly helped by less discounting. Operating margin was 6.1 percent, and the company expects it to be in the high single digits for fiscal 2007.


Murphy, who spent six years at Canadian drugstore chain Shoppers Drug Mart before Gap, said he was meeting employees and visiting stores, and had already had serious meetings on Gap's merchandising and design, which have been criticized in recent years.

He said his experience in varied retail sectors such as food, books and health and beauty were transferable to Gap and that he understands the importance of real estate strategy and consistent store execution together with innovation and product presentation.

Fisher told analysts that new fashion directions at the San Francisco-based company were on target.

Woven tops and clean pants performed well in the second quarter. That is a good sign that we're starting to resonate with our new target customer, said Fisher, adding that he was pleased with denim at Old Navy.

But Gap had failed in recent years to embrace bold color selection, Fisher said. Gap has always been about color, and we let a lot of competitors take that space from us, he said, also acknowledging that too-broad assortments in its denim and khaki lines had become confusing.

Gap shares trade at 16.6 times estimated 2008 earnings, a premium to large retailers like Target Corp and Limited Brands Inc, at close to 15 and 12 times forward-looking earnings, respectively. Gap is also pricier than smaller specialty apparel retailers such as American Eagle Outfitters, valued at 10 times 2008 projected earnings.

Gap shares rose 1 percent to $17.60, after closing on the New York Stock Exchange at $17.40, down 8 cents. Shares of Gap have fallen 9 percent in 2007.