Gap 3rd-quarter earnings jump 26 percent

SAN FRANCISCO -- Gap Inc. said Wednesday its third-quarter profit rose 26 percent as marketing costs fell.

But the company's cost-cutting campaign couldn't compensate for a slowdown in sales at its Gap and Old Navy chains. Companywide revenue was flat, and same-store sales -- a key measure of retail health -- fell 5 percent.

"We feel this is going to be a tough economic environment this upcoming holiday season," Chairman and Chief Executive Glenn Murphy said in a conference call.

Its shares sank more than 6 percent Wednesday.

The San Francisco-based company said net income for the quarter ended Nov. 3 rose to $238 million, or 30 cents per share, from $189 million, or 23 cents per share, in the year-ago period.

Sales were flat at $3.85 billion.

Analysts surveyed by Thomson Financial, on average, anticipated earnings per share of 29 cents on sales of $3.86 billion.

Its shares dropped $1.24, or 6.1 percent, to close at $18.96 Wednesday.

Despite an increased outlook for the full fiscal year, executives sounded notes of caution about the upcoming holiday season.

"The consumer will ultimately be the judge, but we feel we're well positioned -- but we're also very aware this is going to be a tougher environment than we faced last year," Murphy told analysts.

Gap increased fiscal 2007 guidance to a range of 92 cents to 98 cents per share. Executives previously expected a range of 83 cents to 88 cents per share.