Gap, the US clothes retailer, failed to deliver signs that a long-awaited turnround is under way as it reported a sharp fall in profits and lower sales that its chief executive called “unacceptable”.

The group’s net income tumbled 36 per cent from $303m to $193m in the three months to October 29, reflecting the cost of investments in reviving the business, while sales slipped 2 per cent to $3.6bn.

Gap has spent several years struggling to reverse slumping sales after it opened too many stores in the US and lost its verve in fashion and branding while having to grapple with rising sourcing costs.

Sales at stores open at least a year – a key measure of retail performance – were down 5 per cent from a year ago, a figure that included declines in all four divisions: its international business as well as Gap, Banana Republic and Old Navy in North America.

“That is unacceptable,” said Glenn Murphy, chief executive since 2007, who added: “The company has not executed this year in the way it should and the way I expected.”

Shares in Gap closed down 1.2 per cent at $19.25, having declined steadily during the day ahead of its results, which were released 25 minutes before the market close.

Gap’s earnings per share of 38 cents, versus 48 cents last year, were 2 cents ahead of Wall Street expectations. The company did not alter its full-year earnings guidance.

Ken Perkins of Retail Metrics, a research group, noted that earnings per share had been boosted by the effect of share buy-backs, on which the company spent $645m in the quarter. On Thursday Gap announced a new $500m repurchase programme.

Noting that the value of inventory per store was up 6 per cent from a year ago, and forecast to be up “mid-to-high single digits” in the fourth quarter, Mr Perkins said: “They’re probably a little slow on the [product] sell through, so there is a good chance of additional mark downs that could cut into margins.”

As it seeks to rebalance its business, Gap said last month that it would close 21 per cent of its Gap-branded US stores in the next two years and triple its outlets in China by the end of 2012.

So far this year, the company said its capital expenditure had been $416m, which was focused on downsizing Old Navy stores and expanding its international and online businesses. Online sales provided a rare bright spot in its results, rising 21 per cent.

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