Deep discounting and escalating production costs pushed Gap Inc.'s second-quarter profit down 19 percent, raising concern about how it will fare for the critical fall and holiday shopping seasons.
Gap, which operates stores under its namesake, Old Navy and Banana Republic, also reiterated its full-year profit forecast that was slashed in May as the nation's largest clothing chain was struck with faster-than-expected increases in the costs to make its clothing.
The company's weak results were an outlier among string of recent earnings reports by other retailers, from mall-based Abercrombie & Fitch Co to discounter Target Corp. Several major
merchants reported profit increases and said they've been able to push through price increases to shoppers as they offset higher costs in labor and raw materials.
The cost pressures are only compounding challenges at the San Francisco-based retailer, which has been working to revive sales across all of its brands. Its Gap chain, in particular, has posted six consecutive years of drops in sales at U.S. stores open at least a year, a key measure of a retailer's health. The mounting problems could get worse as increasing economic uncertainty and stock market turmoil in the past few weeks could make shoppers more reluctant to spend in the final months of the year.
Gap said Thursday it earned $189 million, or 35 cents per share, in the three months ended July 30. That compares with $234 million, or 36 cents per share, a year ago. Revenue rose 2 percent to $3.38 billion. Analysts had expected 33 cents per share on revenue of
$3.39 billion in the quarter.
The chain's revenue at stores opened at least a year fell 2 percent during the quarter. By division, Gap's domestic business was down 3 percent, while Banana Republic posted a 2 percent decline. Old Navy's domestic business was flat. The company's international division posted a 4 percent drop from a year ago.
"Despite a difficult quarter, we still delivered a net sales improvement, and I continue to believe we have far greater opportunities than challenges ahead of us," said Glenn Murphy,
chairman and chief executive in a statement.
"Every brand, division, and geography is focused on what matters most
delivering consistent, great product and more effective marketing in order to drive higher levels of performance."
Gap has made a number of changes recently. The company had a management shake-up in February that ended with a new brand president, chief marketing offer and ad agency. The company also
established a Global Creative Center and consolidated its marketing in New York. And in early May, the company ousted Patrick Robinson, design director for the Gap chain.
The company, once known for turning basics like T shirts and khakis into must-have fashions, has closed or shrunk stores and cut inventory to boost profits. But it still hasn't been able to solve the biggest issue the chain faces: shoppers aren't buying its clothes.
Robinson had success with the overhaul of Gap's jeans launched for the fall of 2009 and marketed under the 1969 brand. That was followed by a focus on black pants last fall. But he didn't' seem to extend that magic through the rest of the store.
The company reiterated on Thursday that it expects to earn $1.40 per share to $1.50 for the full year. Analysts had expected $1.46 per share.