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Not very suprisingly, Gap Inc. did not post good Q2 results and has lowered their year-end projections:

SAN FRANCISCO, Aug. 17 /PRNewswire-FirstCall/ — Gap Inc. (NYSE: GPS – News) today reported net earnings for the second quarter which ended July 29, 2006 of $128 million, or $0.15 per share on a diluted basis, compared with $272 million, or $0.30 per share, for the same period last year.

Second quarter net sales were $3.7 billion, compared with $3.7 billion for the same period last year. Comparable store sales decreased 5 percent, compared with a prior year decrease of 3 percent.

“The second quarter continued to be challenging, as we aggressively cleared inventory to prepare for fall merchandise, and we invested in marketing and stores to improve second half performance,” said Gap Inc. president and CEO Paul Pressler.

“Each brand is at a different stage in its turnaround,” continued Pressler. “We are encouraged by improved performance at Banana Republic and our online division. And while we are making progress at Gap and Old Navy, we know it will take several seasons of consistent product, marketing, and store improvements to win back our customers. We remain committed to the strategies at each of our brands and to our growth initiatives.”

(The rest of the press release is here.)

The huge markdowns they took towards the end of the season to make way for the new Fall re-launch really hit them hard. This shouldn’t be suprising. A long time ago, everyone should have realized that Q2 was going to be nasty for them.

The turnaround of the Gap brand is going to be hard, as I’ve talked about in the past (here and here). The hardest part now is going to be in remaking their image and getting customers back into the store. And so far, this has been a challenge:

That said, our sales results month-to-date are trending below our expectations. Although we are disappointed with this initial performance, we are not discouraged and are seeing some successes. Our body business is building momentum, and our kids, baby, and maternity division is tracking well.

In adult, customers are responding well to several of our key items. Most notably, our women’s clean pants, clean sweaters, casual bottoms and knits. In men’s, our new khaki pants, fashion cargos, graphic and short-sleeve knits are all performing well.

Denim across the board continues to be challenging, particularly our five pocket jean. Compared to last year, our fall denim buys are lower and we skewed our assortment for trend-right fashion styles in darker washes.

But they are also noting that they are very pleased with the execution in the stores (though, would they really say that they weren’t?) and that their customer service survey scores have increased at Old Navy and Gap. That is a positive sign. The key is going to be getting to each customer, one by one, winning them back, and hoping that they tell their friends about it. Increased customer service scores is a great first step and early indicator of that.

Look for the Fall 2 Update in Mens & Womens to happen at Old Navy on August 28. I am interested to see where they plan on going, fashion wise, post BTS.

Look for 100 adult Gap stores to be remodeled by the end of the year. I guess I am in an area of higher performing Gap stores, since I have three of the new concepts out of the four closest stores.

This will be an intriguing quarter to watch Gap and all of their brands. Except Old Navy and Gap proper to be the most fun to watch, while Banana Republic should continue to build on the moderate momentum that they’ve seen in the first half of 2006.

Will the young adults come back to Gap? Will the increased marketing effort pay off? How will they look in three months, as we go into the Holiday season? I wouldn’t expect a big turnaround this quarter, but I hope for their sake that they are announcing some positive sparks of light come October.

More coverage from Marketwatch and The Street.

Transcript of the conference call provided by Seeking Alpha.

You know, yesterday I went down to my local mall and I took a walk around JC Penney. I have to say, I think they’ve really pulled things together. From the merchandise to the in-store experience, the store looked better than I have seen it in a long time.

Missy and Juniors looks great. I was really impressed by how nice the apparel looked. Lines like a.n.a., Bisou Bisou and Miss Bisou looked really sharp. The euro sizing on the Miss Bisou jeans is a very nice touch. However, I don’t think they are offering the same sort of excitement on the male side of the ball.

With how nice the stores are looking, it’s no suprise that their second quarter results were so strong.

J. C. Penney Company, Inc. (NYSE:JCP) reported record second quarter operating profit and earnings. Operating profit increased 27.2 percent to $271 million from $213 million last year and improved 100 basis points to 6.4 percent of sales. Operating profit improvement was driven by strong sales performance, coupled with improved gross margin and leverage of selling, general and administrative expenses. Second quarter 2006 earnings per share from continuing operations increased 63.0 percent to $0.75 from $0.46 last year. Earnings per share in both years include the benefits of one-time tax credits as well as the effects of the Company’s ongoing share repurchase program.

“The Company had an excellent second quarter, with good customer response to fine jewelry, children’s and women’s accessories, as well as a solid rebound in apparel categories, particularly women’s,” said Myron E. (Mike) Ullman, III, chairman and chief executive officer. “We have broad-based momentum entering the back half of the year and are confident in our competitive positioning. While we are cautiously optimistic about the opportunities that lie ahead, we believe that it is prudent to plan conservatively in the current environment.”

Ullman added, “We continue to improve the fundamentals of our existing businesses and are poised for the acceleration of our new store growth. In the third quarter, we will open 25 stores, with 17 in the new and successful off-mall format. Twenty of these stores will open on October 6th, the most store openings in a single day in the Company’s recent history, and beginning in 2007, we plan to open 50 stores per year.”

(The full press release is here.)

Some notes from the conference call:

Seems that they are aggressively targeting former May shoppers who may feel lost in the Federated/Macy’s rebranding.

Aggressively targeting teens through sponsorship of the MTV Video Music Awards and the Teen Choice Awards. Also exploring and utilizing better opportunities in integrated marketing.

Still looking towards 50 door expansion in 2007 with the majority of the sites being in the off the mall format.

Sephora will be rolled out in 5 new stores this year with a small rollout in FY2007 (half new and half exisiting stores) with the majority of the rollout in FY2008. This is due to many levels of integration that need to happen between Sephora and JC Penney. This is also due, in part, to their desire to not overwhelm the smaller distributors and providers of Sephora product.

Early response to BTS season is positive, as well as early response to new denim offerings (like increased offerings of skinny leg and straight leg jeans).

Like I said, I think that they can continue to improve their Men’s offerings, but they’ve got a good solid base to build from. Other areas of the store are improving and customers are responding well. With economic worries looming, I think they can have a solid second half.

Move coverage from Bloomberg, MSN.com, and Reuters.

See also: Retail roundup – Q1 results, JC Penney.