Gap Cuts Annual Profit Forecast by About 22% as Costs Soar; Shares Decline

Gap Inc. (GPS), the largest U.S. apparel chain, cut its full-year profit forecast by 22 percent as costs to make clothes rose faster than expected. The shares tumbled.

Gap fell as much as $3.44, or 15 percent, to $19.85 in extended trading, after closing up 21 cents to $23.29 at 4 p.m. in New York Stock Exchange composite trading.

Fiscal 2011 profit will be as much as $1.50 a share, the San Francisco-based company said today in an e-mailed statement. Gap had previously forecast a maximum of $1.93 a share.

Expenses per unit will rise 20 percent in the second half, outweighing price increases, Gap said. The apparel industry is facing cost inflation for the first time in two decades because of surging cotton prices and increased pay for workers who make clothes in China and other parts of Asia. Retailers have said they plan to raise prices to counter the higher costs.

“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,” Chairman and Chief Executive Officer Glenn Murphy said in the statement.

First-quarter net income fell 23 percent to $233 million, or 40 cents a share, in the period ended April 30, from $302 million, or 45 cents, a year earlier. Analysts projected 39 cents, the average of 28 estimates compiled by Bloomberg. Total sales declined 1 percent to $3.3 billion while online revenue gained 18 percent to $348 million.

Murphy has boosted profits by closing underperforming stores and shrinking other locations in a U.S. market the company describes as mature. The retailer is now looking overseas for sales growth by expanding into new regions in the past year, including China and Italy.

Murphy has also shaken up the Gap North America brand, which has posted sales declines at stores open at least 52 weeks for six straight years, by replacing its president and head designer. So-called same-store sales fell 3 percent in the first quarter at the chain’s namesake brand.

“We are disappointed in our quarterly performance, however remain invigorated by the opportunities ahead,” Murphy said.

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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