Clothing maker and retailer Gap Inc slashed its full-year profit outlook on Thursday, saying that its price increases will not be enough to keep up with rising cotton and production costs, and shares fell 13 percent.
Gap, which operates the Gap, Old Navy and Banana Republic brands, said product costs should rise about 20 percent later this year and more than outweigh retail price increases.
Gap is battling a slew of rivals, including American Eagle Outfitters Inc on its home turf while fending off Inditex's Zara and H&M globally. Last year, it was overtaken by Zara in global sales.
Gap now expects to earn between $1.40 and $1.50 per share in the fiscal year ending in January 2012, down from the $1.88 to $1.93 it forecast in February.
Net income in Gap's first quarter, which ended on April 30, fell 22.8 percent to $233 million, or 40 cents per share, from $302 million, or 45 cents per share, a year earlier, prompting Chief Executive Glenn Murphy to say he was disappointed.
Wall Street analysts had expected a profit of 39 cents per share, according to Thomson Reuters I/B/E/S.
In recent months, it has shaken up senior management in a bid to revitalize its flagship brand. Two weeks ago, the head of its design team quit, and in February, the company replaced the head of Gap North America after Murphy lost patience with the slow turnaround of the Gap chain.
As previously reported, net sales fell 1 percent to $3.3 billion, while sales at stores open at least a year were down 3 percent. Without its rising online sales, that decline would have been 5 percent.
Same-store sales fell at all three of its chains in North America, where it gets three-quarters of its sales. In the year-ago quarter, all three chains had positive same-store sales.
Overseas, same-store sales fell 6 percent, even as Gap has pinned its growth strategy on expanding outside North America.
One bright spot was its overseas franchise stores, where sales rose 43 percent in the quarter. It now operates 178 franchise stores abroad and is eyeing 400 by 2015.
Gap, which operates about 3,250 stores, said it would open 75 stores this year, up from an earlier plan of 65 openings.
Shares of Gap fell 12.8 percent to $20.30 in trading after the market close on Thursday.
(Reporting by Phil Wahba; Editing by Bernard Orr and Matthew Lewis)