San Francisco—Gap Inc. reported late Thursday that its fourth quarter profit fell 12.5% as the giant retailer was hit by heavy discounting during the holidays to attract consumers.
For the quarter ended Feb. 1, the parent to Gap, Old Navy and Banana Republic posted net income of $307 million, or 68 cents a share, compared with $351 million, or 73 cents a share, a year ago.
Innovations, Not Promotions
Net sales were down 3.2% to $4.58 billion, while comparable sales edged up 1% compared with a 5% increase in the fourth quarter of last year.
Analysts were expecting earnings of 65 cents a share on revenue of $4.58 billion for the quarter.
By retail brand, comparable store sales at Gap increased 1%, compared with a 2% gain a year ago. Comp store sales at Old Navy were little changed after an 8% increase last year, and comp sales at Banana Republic declined 3%, compared with a 3% increase the previous year.
Glenn Murphy, chief executive told analysts on a conference call that Gap, like other retailers, needs to combat the promotional environment by offering shoppers something new.
“We got to continue as a business to be innovative and creative and bring reasons for people to engage in our brands, either online or in our stores, that are not rooted in promotions and discounts with a frequency in which they’re rooted in today,” said Murphy.
For the full year, Gap Inc. said it expects its earnings will be negatively impacted by around five percentage points due to weakening foreign currencies. Thus earnings should be in the range of $2.90 to $2.95 a share.
Nonetheless, the company said it will open 30 additional Gap stores in China during fiscal 2014, in addition to five Old Navy stores in the country.
RBC Capital Markets analyst Howard Tubin noted: “While a necessary evil this past holiday season, price promotions and discounts are not levers Gap Inc. management is happy about having to pull. CEO Murphy believes that “it all starts with the product” and offering compelling and differentiated assortments is the most effective way to drive the business. This is a sentiment with which we completely agree.”