Gap's 1Q profit up 40 percent

NEW YORK -- After posting a 40 percent increase in net income for its first quarter, clothing retailer Gap Inc. is staking a claim in key categories like black pants for the fall as it aims to get its customers to spend more.

The company raised its profit forecast for the full year, but it was below analysts' forecasts.

Its shares fell 43 cents, or 2 percent, after hours to $21.31. During regular trading Thursday, they fell 60 cents, or 2.7 percent, to close at $21.74 as the overall market tumbled.

During a conference call with investors after releasing its earnings report, Chairman and CEO Glenn Murphy gave a cautious thumbs-up as a key measure of revenue rose at all Gap's brands for the first quarter.

"It is still a very volatile consumer environment," Murphy said. For instance, he said, the company can't discern spending patterns for weekends or weekdays, when they used to be distinct.

Gap, which operates the Old Navy and Banana Republic chains as well as Gap stores, said it earned $302 million, or 45 cents per share, for the three-month period that ended May 1. That compares with $215 million, or 31 cents per share, a year earlier.

Gap's quarterly revenue rose 6.4 percent to $3.33 billion.

Excluding a one-time tax gain, Gap earned 43 cents per share. Analysts surveyed by Thomson Reuters, who typically exclude one-time items, on average expected net income of 43 cents per share on revenue of $3.31 billion.

The company, which had been slashing inventory for four straight years, is now buying more merchandise. Inventory was up 12 percent as of the end of the first quarter and is expected to be up in the low double digit percentages in the second quarter. Still, company officials told investors that inventory is 30 percent below 2005's level.

They said Gap is being prudent but making sure it doesn't sell out its hottest items too fast as it did last fall when it ran out of smaller sizes during the relaunch of its denim collection, Murphy said.

Fueled by its turnaround in the U.S., the company is in a strong position to expand overseas and online, he said.

Gap announced in February that it plans to open its first Gap stores in China and Italy and expand Banana Republic in Europe. It also aims to offer e-commerce for customers in Canada, the United Kingdom and nine other countries in Europe.

Led by low-price Old Navy, the company's revenue at stores open at least a year rose 4 percent for the quarter. The figure is based is a key indicator of a retailer's health because it excludes the effects of expansion and stores closing.

Revenue at its Old Navy stores in North American that have been open at least a year rose 7 percent, as the chain's return to its target market of frugal moms is paying off.

Old Navy, which had lost market share for five years ending in 2008, has been remodeling its stores to make them easier to shop. By the end of its second quarter, Old Navy plans to remodel 200 stores, one quarter of the division's fleet.

The figure rose 5 percent for Banana Republic stores in North America, and 2 percent for Gap's North American business. The company's international business was unchanged from a year earlier.

Gap now expects to earn $1.77 to $1.82 per share for its fiscal year, up from previous guidance of $1.70 to $1.75.

Analysts had projected $1.83 per share.