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Gap drops earnings target as profits plummet in Q1


Net income at global fashion retailer Gap decreased by a huge 23 per cent to $233 million (£143.3 million) in its first quarter, forcing it to downgrade full-year predictions.

In results published today, Gap confirmed that estimates on end of year diluted earnings per share have been dropped to between $1.40 and $1.50, compared to a range of $1.88 to $1.93 a share predicted in February.

Comparable store sales for the three months ending April 30th 2011 were down three per cent on the same period last year, when trading grew five per cent, with international sales the weakest segment down six per cent year-on-year.

The US-based firm blamed the earthquake and its aftermath in Japan during March as the main contributor to the profits drop, with sourcing costs rising considerably.

Glenn Murphy, Chairman and CEO of Gap, said: “We are disappointed in our quarterly performance, however remain invigorated by the opportunities ahead.

“We’re focused on making the necessary adjustments across the business to deliver the kind of sales we should expect from our brands.

“While we acknowledge that costing pressure is impacting our business, we’re working hard to navigate this short-term macro challenge to our profitability in the current fiscal year.”

Costs for the second half of the year are now expected to rise above initial estimates, with the retailer now expecting product costs per unit to grow by about 20 per cent which will more than outweigh retail price increases.

Despite this, Gap remains in a strong financial position and its franchise operations and online division both delivered trading increases during the quarter.

The company has invested in $127 million of capital expenditure in Q1, with stores including franchises now totalling 3,245 in 32 countries, and total spending on capital projects is to expected to reach $575 million by the end of the year.

Franchise net sales over the three-month period grew by 43 per cent compared with last year, whilst total online sales rose by 18 per cent to $348 million year-on-year.

Murphy added: “Our strategy remains the same - to deliver consistent, steady growth in North America while investing in our long-term global initiatives, especially in online and international.”

Published on Friday 20 May by Editorial Assistant

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