UPDATE 1-Gap profit beats Street by a penny

(Recasts, adds estimates, sales, background, margin detail)

SAN FRANCISCO, Aug 21 (Reuters) - Gap Inc (GPS.N: Quote, Profile, Research) said on Thursday that higher profit margins contributed to a rise in quarterly net profit that beat Wall Street projections by a penny, even as sales trends proved disappointing at its chains.

Gap shares rose 1.5 percent in after hours trading.

The owner of the Gap, Old Navy and Banana Republic chains said second-quarter net profit was $229 million, or 32 cents per share, compared with $152 million, or 19 cents per share, a year ago.

Results beat by a penny the 31 cents expected, on average, by analysts polled by Reuters Estimates.

Total sales fell 5 percent to $3.5 billion from $3.69 billion in the quarter, roughly in line with the nearly $3.51 billion expected by Wall Street.

Gap, one of the largest apparel retailers in the world with over 3,000 stores, has been trimming costs, reducing inventory and streamlining operations to shore up its business that has suffered due to years of sliding sales due to competition and fashion miscalculations on the part of the company.

Chief Executive Glenn Murphy has characterized 2008 as a turnaround year. A focus is on boosting profit margins, rather than sales, which some analysts believe will revive in due course as former Gap fans see that new product in stores is higher quality, on-trend and more age-appropriate than in years past.

Gross profit margins increased 390 basis points during the quarter. Gap said it now expects its fiscal 2008 operating profit margin will be roughly 10 percent of sales from its earlier view of 8.5 percent to 9.5 percent.