For clothing retailer Gap (GPS), rising input costs and the Japanese earthquake are tearing into earnings. Net income for the first quarter for fiscal 2011, which ended April 30, fell 23 percent to $233 million compared with $302 million for the same period a year earlier. Diluted earnings per share for Gap during the quarter fell to 40 cents from 45 cents.
Net sales fell 1 percent to $3.30 billion, which includes the impact of the March earthquake in Japan. Comparable sales, which include comparable online sales, dropped 3 percent.
The rising cost of inputs — pricier cotton namely — coupled with sluggish consumer demand and the earthquake's disruption in the key Japanese market is to blame. "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," says Gap Chairman and CEO Glenn Murphy.
"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."
The company has opened more stores in China and continues to expand in Italy, Serbia, Ukraine, and elsewhere. Still, Gap cut its fiscal 2011 earnings guidance to between $1.40 and $1.50 from an earlier expectation of between $1.88 and $1.93 per share.
Analysts may be watching the effects of the earthquake and the global economy on earnings, but they are thinking longer term as well. "Moody's expect the earnings decline from both Japan and rising cotton costs to be temporary," the ratings agency writes in a recent review on a company notes issue.
Things are looking up. Sales are improving, even if just a little, although the company recognizes it's not out of the woods yet. Net sales for the four-week period ended May 28, 2011 hit $1.06 billion compared with $1.05 billion for the same period a year ago.
The company’s comparable sales for May 2011, which include the associated comparable online sales, were down 4 percent compared with a 1 percent increase for May 2010.
"While net sales increased in May, we recognize the need for our brands to consistently deliver at much higher levels of performance – with improved traffic and greater product acceptance – to support our long-term growth strategy," Murphy said in a separate statement.
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