By Nivedita Balu and Melissa Fares
(Reuters) - Gap Inc's (N:GPS) namesake brand reported a bigger-than-expected drop in quarterly same-store sales on Thursday, sending shares down nearly 7 percent in after-hours trade even as the apparel retailer beat Wall Street profit expectations and posted strong revenue.
The results signaled the San Francisco company still must work to revive its Gap brand, which has struggled to keep pace with fast-fashion rivals such as H&M (ST:HMb) and Forever 21 and tackle the dominance of Amazon.com Inc (O:AMZN).
Reaffirming its forecast on Thursday, Gap Inc battled rising inventory during the quarter, especially that of Gap brand, as older styles and some summer basics remain on the shelves.
The company earlier offered huge discounts on Gap-label apparel mainly to clear inventories but which ended up hurting sales and margins.
Gap executives said on Thursday the focus has turned toward improving margins.
"Obviously, we're not pleased with this performance," Chief Financial Officer Teri List-Stoll told analysts on a conference call, but added, "it reflects the conscious choice to prioritize margin dollars over comp growth as we continue to move through the inventory issues in the brand."
List-Stoll expects some improvement in the fall and through the holidays.
But Gap brand's assortment continues to look boring, with little effort being made to create newness, Neil Saunders, managing director of GlobalData Retail, said on Thursday.
"It discourages people from visiting and purchasing ... It means Gap struggles to charge full price and has to resort to continuous discounting to try and stimulate sales," Saunders said in emailed comments.
Gap Chief Executive Art Peck said an improved supply chain remains a focus.
"There's no question that this is an important factor of powering Old Navy's consistency, Athleta's growth and Banana's continued turnaround," Peck said on the same call, referring to Gap's other brands.
Old Navy, which offers lower-priced apparel, again performed well. Same-store sales rose 5 percent, topping analysts' estimate of 4.5 percent growth.
Sales at Gap brand stores open for more than a year fell 5 percent in the fiscal second quarter, more than the 2.55 percent decline forecast by analysts, according to Thomson Reuters I/B/E/S.
Gap Inc's net sales rose 7.5 percent to $4.09 billion in the second quarter ended Aug. 4, beating analysts' average estimate of $4.01 billion.
Excluding certain items, Gap earned 76 cents per share, beating the average estimate of 72 cents.
Gap shares were down 6.6 percent at $30.30 in after-hours trading.