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Gap Says Athletic Wear to Fuel Quick Recovery After Lackluster Q1

Gap Inc. recently announced that its first quarter fiscal year 2014 earnings increased just 1 percent to $3.77 billion compared with $3.73 billion last year. Despite the progress, the earnings were considered disappointing as the retailer’s earnings per share (EPS) dipped 18.3% to $0.58, the first EPS decrease in three years.

During the earnings call, company chairman and CEO Glenn Murphy, said the company could have done better in several aspects, including customer communication, inventory management and the timing of its product launches. However, he said the company expects a quick recovery based on its strong connections to consumers.

While Old Navy was the company’s standout earner with a 1 percent increase in first quarter sales, sales at Gap dropped 5 percent and Banana Republic’s sales dipped 1 percent.

The company did not break out Athleta’s sales, but Murphy said, “they had a very good first quarter.” Performance at the workout-wear brand was boosted by the opening of six new stores during the first quarter. “In the last 30 days we have added five new Athleta stores to our planned list and our guidance, and now we are going to open 35 Athleta stores in 2014, which will allow us to end the year with 100 Athleta stores,” Murphy stated.

Athletic wear might be the company’s source of growth. In February, Murphy declared athletic wear the “new denim” during an earnings call. Since then, Gap stores have taken cues from Athleta and moved Gap Body’s athletic apparel–or “soft dressing” as Gap describes it–toward the front of stores.

Gap’s interest in gaining market share in the athletic apparel category is further fueled by the success of Lululemon Athletica. In March, the Canadian soft dressing retailer posted a 7 percent increase in fourth quarter 2013 net revenue. Lululemon Athletica’s comparable products sell at a slightly higher price and is on sale less often as Athleta and Gap Body.

Similarly, the success of athletic brands including Foot Locker, which saw a 14 percent increase in first quarter revenue, echo what Goldman Sachs’ reported in its recent Millennial Impact study: Millennials are passionate about working out, organic good and fashionable gym apparel.

Likewise, in April, Under Armour reported a 70 percent spike in profit due to apparel and footwear growth. Nike also logged a 12 percent increase in future orders, confirming a strong global demand for athletic goods.