Gap's 1Q net income falls 23 percent as costs soar
NEW YORK (AP) — Rising costs, especially for its lower-priced items, helped Gap Inc.'s first-quarter earnings sink 23 percent as its revenue fell only slightly, the company said Thursday.
Gap, which operates the Banana Republic and Old Navy brands as well as Gap, said it's spending about 20 percent more to produce each item than it did a year ago — a much faster rise than it expected.
The company's recent price increases have not kept pace, and it dramatically lowered its full-year earnings forecast on Thursday.
Gap said its net income was $233 million, or 40 cents per share, for the quarter that ended April 30. That compares with $302 million, or 45 cents per share, a year earlier.
Its revenue fell 1 percent to $3.29 billion.
The shares fell $2.30, almost 10 percent, after hours. They had ended regular trading at $23.29.
The performance was slightly better than analysts expected, however, according to FactSet. Analysts on average forecast earnings of 39 cents and revenue of $3.27 billion.
Many clothing companies' costs for raw materials like cotton and labor are rising. But Gap's first- quarter earnings drop shows that it has been unable to navigate the challenges as well as rivals like J.C. Penney Co. or Abercrombie & Fitch.
Gap and others plan price increases this fall to pass along higher costs to consumers, but how much they can push to shoppers in a still challenging economy remains to be seen.
"While we acknowledge that costing pressures is impacting our business, we're working hard to navigate this short-term macro challenge to our profitability in the current fiscal year," Glenn Murphy, chairman and chief executive officer of Gap Inc., said in a statement. "That said, our strategy remains the same — to deliver consistent steady growth in North America while investing in our long-term initiatives, especially in online and international."
The rising costs compound other challenges facing the company. Gap has made a series of management and organizational changes to revive sales at its namesake brand, which has long sagged. In February, Art Peck, who had led Gap's outlet business, became president of the Gap brand. He is the brand's fifth president in nine years.
The company also established a Global Creative Center and consolidated marketing for the San Francisco-based company in New York. And last month, Gap Inc. ousted Patrick Robinson, design director for the Gap chain.
The company is continuing to remodel Old Navy stores with the goal of having 400 in a new format by year's end.
Gap now expects to earn $1.40 to $1.50 per share for the year, down from its February forecast for $1.88 to $1.93 per share. Analysts had expected $1.84 per share, according to FactSet.
The company said the earthquake and tsunami in Japan, where it operates a cluster of stores, cut into its revenue, but it didn't offer details.