Nov. 21 (Bloomberg) -- Gap Inc., the largest U.S. clothing retailer, said third-quarter profit rose 26 percent on reduced marketing, and forecast full-year earnings that may trail analysts' estimates. The shares fell the most in two years.

Net income climbed to $238 million, or 30 cents a share, from $189 million, or 23 cents, a year earlier, Gap said today in a statement. Profit was within the preliminary range the retailer reported Nov. 8.

Sales at stores open at least a year dropped 5 percent. New Chief Executive Officer Glenn Murphy has reduced inventory to limit markdowns and hired several executives to improve merchandise and reverse two years of declining revenue. The worst housing slump in 16 years is pressuring consumer spending, resulting in a ``tough'' economic environment for the holidays, Murphy said.

``They've cut costs, yes, they've managed inventory well, but you can't keep doing it,'' said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York-based retail consulting firm. ``It's not sustainable. Gap has been a loser three straight years. Their market share has been shrinking off the charts.''

Excluding costs to cut jobs and shut down the Forth & Towne chain, Gap said full-year profit would be 99 cents to $1.05 a share, up from at most 95 cents. Analysts surveyed by Bloomberg estimated $1.05.

Gap, which also operates the Old Navy and Banana Republic chains, fell $1.24, or 6.1 percent, to $18.96 as of 4 p.m. in New York Stock Exchange composite trading, the biggest drop since November 2005. The stock has declined 2.8 percent this year, compared with a 19 percent decrease in the Standard & Poor's 500 Retailing Index.

Retailer Forecasts

J.C. Penney Co., Kohl's Corp. and other retailers have lowered profit predictions for the holidays as consumers face higher food and fuel costs.

``Given that we are still in a turnaround, it is difficult to predict how product will be accepted,'' acting Chief Financial Officer Sabrina Simmons said today during a conference call with analysts.

Nineteen analysts surveyed by Bloomberg estimated average profit at Gap of 29 cents a share. The retailer said Nov. 8 that earnings rose to 28 cents to 30 cents, including a tax benefit of 1 cent.

Gap boosted profit by reducing marketing by $75 million and stocking fewer items to cut back on markdowns.

Revenue rose 0.8 percent to $3.85 billion, San Francisco- based Gap said, helped by a 36 percent gain in Web sales. Same- store sales dropped 8 percent at Old Navy, the largest brand by revenue, 6 percent in Gap North America, and 4 percent overseas. Banana Republic's comparable sales climbed 1 percent.

Marketing Campaign

Old Navy has a ``fully integrated'' marketing campaign, with weekly promotions, said Murphy on a conference call with analysts and investors. The Gap chain's ``Crazy Stripes'' campaign and Banana Republic are emphasizing color, he said.

``We need to start seeing the full-price customer coming back in, and it will be a gradual process,'' said Mark Montagna, an analyst at CL King & Associates in New York. He rates the shares ``strong buy'' and doesn't own any.

Gap operates 3,191 stores worldwide.

Gap named Murphy as its new CEO and chairman in July, replacing Paul Pressler, who resigned in January. Murphy, 45, led Shoppers Drug Mart Corp., Canada's biggest pharmacy chain, for six years before stepping down in March. Sales at the Toronto-based chain doubled during Murphy's tenure.

New Designers

Gap, known for its casual T-shirts and khaki pants, has appointed new heads and designers for its brands. In September, the retailer hired Todd Oldham as chief designer for the Old Navy unit. Oldham has appeared on MTV's ``House of Style'' television show and previously designed a line of dorm-room furnishings for Target Corp.

``New management's going to have to come up with a change in this company in how they're doing business,'' Eric Beder, a retail analyst at Brean Murray Carret & Co., said yesterday. ``People are giving new management a pass here to try to see what they are going to do.''

The retailer was founded in 1969 by Donald Fisher and his wife Doris. Robert Fisher, their son, served as interim CEO earlier this year.

To contact the reporter on this story: Heather Burke in New York at hburke2@bloomberg.net .