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Gap's 1Q profit falls 22 per cent on currency fluctuations, poor start to season

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NEW YORK, N.Y. - Gap said that its first-quarter profit fell 22 per cent, as the clothing chain's results were hampered by foreign currency fluctuations and a slow start to spring selling.

Nevertheless, the San Francisco-based retailer, which operates stores under the Gap, Old Navy, Banana Republic and Athleta names, reiterated its annual profit outlook.

"After a disappointing start, I'm pleased with how the business performed toward the end of the quarter, especially at Old Navy," said Glenn Murphy, chairman and CEO of Gap Inc. in a statement.

Like many retailers, Gap's business in the first quarter was hurt by heavy discounting to bring in customers who stayed away amid wintry weather earlier in the year. Murphy also acknowledged in an earnings call with investors that the fashions were a "little too spring forward." Still, it's faring better than rivals like American Eagle Outfitters Inc., which saw its quarterly earnings tumble 86 per cent on huge markdowns intended to generate foot traffic. American Eagle said earlier in the week that it would close 150 stores over the next three years.

But Gap's hiccup in the quarter underscore the challenges that the company faces in keeping the momentum going since enjoying a turnaround starting in early 2012. Gap has been stepping up its marketing and offering trendier merchandise.

Gap is also expanding outside the U.S. It announced last month it plans to more than triple sales in China in three years as it seeks to grab a bigger piece of the overall $1.4 trillion global clothing market. It generated $300 million in sales in China in the latest fiscal year ended Feb. 1. It says China will be its biggest growth initiative.

The company had 81 Gap stores in China at the end of last year and unveiled its first Old Navy store in the country earlier this year. It said Thursday it's on track to open about 30 additional Gap stores in China in the current fiscal year.

Gap is also trying to meld its online business with its physical stores as it sees shoppers' purchases influenced by the Web and mobile devices.

As part of that strategy, the chain is expanding a program it began testing a year ago that allows customers to reserve merchandise online and then pick it up at the store within 24 hours. By the end of the second quarter, it will have that service in all of Gap-branded stores. Overall, the service will be in more than 1,000 Gap and Banana Republic stores.

Gap earned $260 million, or 58 cents per share, in the three-month period ended May 3. That compares with $333 million, or 71 cents per share, in the year-ago period. The year-ago results benefited by 4 cents per share from the favourable resolution of tax matters.

The company said that currency fluctuations reduced first-quarter 2014 per-share results by about five percentage points.

Revenue rose 1.2 per cent to $3.77 billion.

Analysts had expected a profit of 57 cents on revenue of $3.76 billion, according to FactSet.

Revenue at stores opened at least a year fell 1 per cent in the quarter, reversing a string of quarterly gains for that measure. By division, Gap's global business fell 5 per cent, while Banana Republic slipped 1 per cent. Old Navy's global business rose 1 per cent.

Murphy told investors that Old Navy is the one brand that is "furthest along" in terms of performance. He praised its assortment and noted the division is revamping its online site, which shoppers will see next month.

As for Banana Republic, he noted women's business has "turned the corner." He noted that Gap is moving in the right direction, and is moving toward a global assortment.

Athleta, whose roots were online, is on track to end the year with 100 U.S. stores, the company said.

Online sales increased 13 per cent to $575 million for the first quarter.

Gap said that it still expects annual earnings per share of $2.90 to $2.95. Analysts had expected $2.94 per share.

Shares added 16 cents to $41.02 in after-market trading after closing up 30 cents to $40.86 in regular trading.

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Follow Anne D'Innocenzio at — http://www.Twitter.com/adinnocenzio

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