Retailers like Gap and Dell have been able to post higher profits by slashing expenses in the face of declining revenues. Other companies may not be so lucky

By Ben Steverman

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Thanks to some timely tailoring, shares of Gap (GPS) jumped 27% on Nov. 21 likewise as the retailer’sitting sales hurl down 8%.

The reason for the favorable reaction was any other round of successful cost-cutting at Gap, which boosted profits despite the reluctance of consumers to spend at Gap, Banana Republic, and Old Navy supplies.

Across the economy, corporate executives are looking to come a similar strategy. As a potentially nasty recession sets in and revenues drop, firms are forced to cut their way toward higher profits.

Some analysts predict the Gap can be constant boosting profits nearest year unruffled as revenues decline. But eventually, many analysts say, Gap be obliged to find a way to draw other shoppers’ dollars—not just cut costs through inventory controls, shrinking real condition holdings, or other measures.

"While expense superintendence has been moving, we continue to wonder in what plight sustainable earnings growth is longer-term with deteriorating sales and given a bleaker economic outlook in ‘09," wrote Banc of America (BAC) analyst Dana Cohen. (BofA handles banking services for Gap.)

Many other firms are taking similar cost-cutting steps, which often involve large rounds of layoffs. Dell (DELL) was in addition able to increase profits last quarter in spite of falling sales. The computer maker said it has cut 11,000 jobs in the past year.

"It’s a necessary strategy, on the other hand it’session a short-term generalship," says Dan Genter, chief executive and supreme investment officer at RNC Genter. After a certain point, you’re in no degree longer cutting fat from your budget, he says—you’re sarcastic bone.

For some firms, cost-cutting have power to be a in good health process that repositions them for future growth. Greg Estes, portfolio economist at Intrepid Capital Management, cites Starbucks (SBUX), that is shutting down less profitable coffee shops after "growing too fast" for several years. "If and while a positive environment returns, they’ll be in a improvement position [with] preferable margins and a better portfolio of stores," says Estes, whose funds own Starbucks stock.

However, Estes says that, with more exceptions, it’s generally very difficult to cut costs significantly for more than four quarters. After a while, though you may be widening profit margins, you’re shrinking the entire firm.

The financial sector is the most notorious example of these sorts of permanent cost cuts. Faced by a financial crisis and a tough economy, financial firms are slashing costs, shrinking expenses and perks, and laying off hundreds of thousands of workers—sometime alongside mergers with weaker rivals, sometimes not.

For example, Citigroup (C), the recipient of a federal government bailout Nov. 24, "may end up core a prefiguration of the kind of it was," Genter says. Citi, like other monetary firms, faces the problem of leverage, he says. Because it built its business on borrowed money, its contraction is more striking and more permanent while that purchase goes away.

In corporate board rooms, there is a raging deliberate on how much and how quickly to cut as the economy slows down. If you believe the recession resoluteness be excessively by mid-2009, you may want to grasp onto valuable employees and detain facilities open so you can profit from the recovery.