Gap 1Q profit flat but outlook bright, shares rise

Associated Press + More

By ANNE D'INNOCENZIO and MAE ANDERSON, Associated Press

NEW YORK (AP) — Revenue gains at its Old Navy, Gap and Banana Republic chains and online helped clothing seller Gap Inc. overcome rising costs and post first-quarter net income on Thursday that was unchanged from a year earlier.

The company raised its guidance for the year, and its shares climbed after hours.

Gap has struggled for years to reclaim its status as a fashion leader, but the results show that it's starting to get back its fashion groove and draw more people to shop in its stores. The company stepped up its marketing and pushed colorful trendy clothing, from brightly colored jeans to stylish T-shirts.

"During the quarter, we improved sales, grew earnings per share and continued investing in the business to drive performance," said CEO Glenn Murphy.

But Murphy was cautious during a conference call with investors following the report's release.

"While it's nice to celebrate this small win in the first quarter, it's a long year," Murphy said. "We have a lot of initiatives in place."

Gap said its net income was $233 million, or 47 cents per share, for the period that ended April 28. That includes a benefit of a penny per share related to reassessing its tax position, Gap said.

Analysts on average forecast earnings of 46 cents per share, according to FactSet. Gap's earnings rose on a per-share basis, even though its net income was flat, because the company had 16 percent fewer shares outstanding.

Gap first announced its quarterly revenue earlier this month. It rose 6 percent to $3.49 billion, topping analysts' average forecast for $3.46 billion.

The company said its revenue from stores open at least a year, an important gauge of retailers' health, rose 4 percent. The comparison is considered key because it isn't skewed by results from stores that open or close during the year.

The measure rose 5 percent at Gap and Banana Republic stores in North America and 4 percent at Old Navy stores in North America. It fell 4 percent at international stores, though total overseas revenue rose 13 percent to $511 million.

Online revenue rose 18 percent to $410 million, the company said.

Standouts in the effort to design fashions to resonate better with shoppers included a Gap Kids partnership with Diane Von Furstenberg and Banana Republic's partnership with AMC's hit show "Mad Men." Also luring shoppers was Gap's colorful clothing.

Gap has made major staff changes. Last month, it named Stef Larsson, former head of global sales for H&M, as president of the Old Navy brand. He'll start by the end of October, replacing Tom Wyatt, who resigned in February.

The company already had brought back Tracy Gardner as creative adviser. She's expected to make an imprint on holiday fashions, executives said during the call.

A February 2011 management shakeup ended with a new president for the Gap brand, and a year ago the chain's design director, Patrick Robinson, was ousted. San Francisco-based Gap also established a Global Creative Center and consolidated its marketing in New York.

Gap said its operating expenses were $980 million, up $62 million from a year earlier, and its margin was about 10 percent. Marketing expenses rose $20 million to $139 million in the most recent quarter, including greater investment in marketing the Gap brand.

The company raised its forecast for full-year earnings to a range from $1.78 to $1.83 per share; that's up from $1.75 to $1.80 per share. Analysts expect $1.97 per share.

After hours, Gap shares rose more than 8 percent at one point. They settled up $1.04, or 4 percent above their closing price of $26.31. The shares had lost 79 cents during regular trading Thursday. Over the past year, they've traded between $15.08 and $29.23.

The company has been expanding in other countries as it pares back its fleet of U.S. Gap stores by 34 percent by the end of 2013, compared with 2007, not including Gap Outlets. That will leave 700 Gap stores. The company plans to maintain its Old Navy stores in North America but make them smaller.

More than two-thirds of the company's revenue came from stores in the U.S., 12 percent was generated online and the rest in other countries.

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