Gap Profits Jump 43 Percent As Retailer Declines To Sign Bangladesh Factory Safety Accord

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AP
AP

NEW YORK -- After years of struggle, Gap is back in style.

Gap Inc., which owns The Gap, Old Navy and Banana Republic clothing chains, on Thursday reported a 43 percent jump in its fiscal first-quarter net income, as the company continues to reap benefits from the turnaround plan that it began early last year.

The retailer's comeback comes just after it failed to endorse an accord on Bangladesh building and fire safety. Gap, which does business with 78 factories in Bangladesh, was pressured to sign the agreement after the collapse of a garment factory that killed more than 1,100 people.

CEO Glenn Murphy said the accord did not "make sense" for the company and that it would sign the agreement if rules on "how disputes are resolved" are changed. Gap is among at least 14 North Americans retailers that declined to sign the safety accord.

The results are welcome news for customers and investors who had watched the one-time industry darling flounder over the past several years. Gap's performance shows that efforts by the chain to attract customers with brightly colored fashions and lively ads are helping to boost sales.

"We are pleased with our strong start to the year, especially first-quarter sales," Glenn Murphy, chairman and CEO of Gap, said in a statement. Murphy pointed to the improving mindset of the consumer, noting the improving housing market and job picture and the stock market's gains.

"The consumer has been operating pretty much for the last five-plus years in a very challenging environment," he said on a call with analysts. "This is the first quarter in a long time that the consumer, to us, felt like they were moving in a more positive direction."

Gap executives did not mention the recent push by activists for clothing makers to form a global pact aimed at improving safety in Bangladesh clothing factories. Gap said last week that it couldn't join the pact unless a provision was made that it felt would free it from unlimited legal liability. The San Francisco-based retailer also backed an outlook for the full year that remains below analyst expectations. Gap said that the weaker yen will impact its fourth quarter.

That weighed a bit on shares after-hours, dragging the stock down about 3 percent. Still, Gap shares are more than double what they were worth in January 2012 when the turnaround started to gain hold. The stock closed Thursday's regular session up 32 cents at $41.36, near its 52-week high of $41.86.

Gap said it earned $333 million, or 71 cents per share, in the three-month period ended May 4. That compares with $233 million, or 47 cents per share, in the year-ago period. Revenue rose 7 percent to $3.73 billion. Analysts had expected 69 cents per share on revenue of $3.73 billion, on average.

Revenue at stores opened at least a year – an industry measurement of a retailer's health – rose 2 percent for the entire chain. The global businesses at both Gap and Old Navy each posted an increase of 3 percent, while Banana Republic's global division was unchanged from a year ago. Online revenue rose 27 percent.

CFO Sabrina Simmons said on the call that results benefited from a shift in the calendar. This year's quarter included a big May selling week versus a small selling week in February in the 2012 quarter.

It's been a long uphill slog for Gap. After turning basics like T-shirts and khakis into must-have fashions in the 1990s, the San Francisco-based retailer fell out of favor with customers after the turn of the century. Poor fit, boring fashions and drab colors hurt the company's flagship brand for most of the past decade.

After Murphy took the top job in 2007, the chain began closing and shrinking stores and cutting inventory to boost its profits. But Gap still struggled to solve its biggest problem: shoppers weren't buying its clothes unless they were deeply discounted.

These days, Gap is striking the right note with customers. The company has overhauled management, launched new ads and formed partnerships with other designers. It's also hired new talent: The Banana Republic division brought in fashion designer Narciso Rodriguez, who began serving as an adviser to the brand starting with the fall 2013 collection.

And like many companies, Gap, which operates a total of 1,385 stores globally, has been looking overseas for growth. In China, Gap opened two additional stores in the first quarter for a total of 49 stores in that country.

Gap said Thursday that it continues to expect earnings for the full year to range between $2.52 per share to $2.60 per share. Analysts have forecast $2.72 per share, on average.

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AP Writer Mae Anderson in New York contributed to this report.

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