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Costing pressure is impacting Gap business
May '11
Gap Inc reported that net income for the first quarter, which ended April 30, 2011, decreased 23 percent to $233 million compared with $302 million for the first quarter last year. Net sales decreased 1 percent to $3.30 billion, which includes the impact of the March 2011 earthquake and related events in Japan. Comparable sales, which includes associated comparable online sales, decreased 3 percent. First quarter diluted earnings per share was $0.40.

As stated earlier in the year, the company expects business performance during fiscal year 2011 to be heavily impacted by pressure from sourcing cost inflation, particularly in its value channels. While the company anticipated that the cost of goods would increase during the back half of the year, costs are actualizing above the initial estimates. The company now expects product costs per unit to be up about 20 percent in the back half of the year, which will more than outweigh retail price increases. As a result, the company has revised guidance for fiscal year 2011 diluted earnings per share to be in the range of $1.40 to $1.50.

“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,” said Glenn Murphy, chairman and chief executive officer of Gap Inc. “That said, 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.”

During the quarter, the company continued to make bold and necessary changes both organizationally and operationally to simplify decision-making, bolster speed of execution, and accelerate global growth. During the first quarter of fiscal year 2011, the company announced several organizational changes in Gap brand including the formation of a Gap Global Creative Center in New York, as well as the initiation of a formal search to replace the brand's head of Adult product design. The company also combined its international operations into one division, based out of London.

Murphy added, “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.”

Additional First Quarter Highlights

• Repurchased about 25 million shares for $548 million, underscoring the company's continued commitment to return cash to shareholders.
• Raised $1.65 billion of debt, reflecting the company's financial strength and ability to generate consistent and strong operating cash flow.
• Total online net sales increased 18 percent to $348 million compared with $295 million last year.
• Continued to deliver on its global growth plans by launching a Gap store on China's largest e-commerce website, Taobao Mall, bringing the brand's modern, accessible style to online shoppers across Asia. The global retailer also opened another company-operated Gap store in Beijing, bringing Chinese consumers a fifth store to experience and shop the brand's affordable and high quality clothes.

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