Gap's quarterly profit beats; says working on plan to split Old Navy

By Nivedita Balu

(Reuters) - Gap Inc <GPS.N> edged past lowered expectations for quarterly profit on Thursday and reiterated its plan to separate Old Navy from the namesake brand, days after the retailer cut its annual forecast and replaced longtime chief executive officer.

Shares of the company, which have lost more than a third of its value this year, rose nearly 2% in extended trading, as the apparel retailer said it was well prepared for the holiday season.

Gap replaced CEO Art Peck with Robert Fisher, a member of the founding family, as its interim head nearly two weeks ago and cut its full-year profit forecast.

Following the announcement, Wall Street lowered its third-quarter earnings estimates by nearly 5 cents.

The San Francisco-based retailer has been struggling to revive sales at Gap and Banana Republic due to declining mall traffic, a rise in online retailing and competition from fast-fashion brands including Inditex's <ITX.MC> Zara and H&M <HMb.ST>.

In February, Gap plotted a plan to separate its better-performing Old Navy brand, giving investors hopes that the standalone company would be able to show better results than the namesake brand.

"While I am confident about our future, I'm also realistic about the challenges ahead," Fisher told analysts in a post-earnings conference call. "Our brands are underperforming today and have been pressured by uneven execution."

Fisher backed the spinoff plan and said he would set up an executive committee constituting heads of Old Navy and Banana Republic.

"The split is key. Everything else is noise," said Eric Schiffer, CEO of Patriarch Organization, a private equity firm.

For the busy shopping season, Gap said its latest designs like plaids and Jingle Jammies pajama sets, a partnership with a Netflix Inc's <NFLX.O> holiday movie, Clause, new ad campaigns and a store-collect option are expected to drive sales.

Net sales fell 2.2% to $4 billion in the third quarter ended Nov. 2, but beat the analysts' average estimate of $3.96 billion, according to IBES data from Refinitiv.

Excluding items, it earned 53 cents per share, 2 cents more than expectations. It had earlier set a target of 50 cents to 52 cents per share.

(Reporting by Nivedita Balu in Bengaluru; Editing by Amy Caren Daniel)