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Here’s Why Gap Just Cut Its 2015 Profit Forecast

November 20, 2015

Gap has pulled an ad image that some found racially insensitive.Gap has pulled an ad image that some found racially insensitive.
Gap has pulled an ad image that some found racially insensitive.Photograph by Justin Sullivan — Getty Images

Apparel retailer Gap (GPS) cut its 2015 profit forecast, hurt by a strong dollar and weak sales at its Banana Republic and Gap brands but Chief Executive Arthur Peck said the brands would see a material improvement in spring. Shares, however, are up 6% as of Friday morning.

A series of fashion misses, particularly in women’s merchandise, have turned shoppers away from the Gap brand toward competitors such as American Eagle Outfitters (AEO), H&M, Forever 21 and Inditex’s Zara.

Gap cut its 2015 adjusted profit forecast to $2.38-$2.42 per share from $2.75-$2.80.

Net income fell to $248 million, or 61 cents per share, in the third quarter ended Oct. 31, from $351 million, or 80 cents per share, a year earlier.

Excluding items, the company earned 63 cents per share.

Revenue fell about 3% to $3.86 billion, the company said on Nov. 9.

The strengthening of the dollar, particularly against the Japanese yen and Canadian dollar, hit sales by about $100 million in the third quarter, the company said on Thursday.

The company had earlier expected an impact of $98 million.

Gap received about 23% of net sales from outside the United States in the quarter.

Company-wide comparable sales fell 2%, dragged by a 4% drop at the Gap brand and a 12% decline at the Banana Republic division.

Gap’s Old Navy line, however, has been a bright spot for the company, attracting customers with its affordable-yet-trendy merchandise.

Tight inventory controls and short lead times have also helped the company offer fewer discounts at Old Navy, helping margins.

Comparable sales at Old Navy increased 4% in the third quarter, and sales rose to $1.62 billion.

Up to Thursday’s close of $25.09, Gap’s shares had fallen about 4% this year.