Despite booking a 40% drop in fourth quarter profit as it battled higher costs, promotions and lower sales, US specialty retailer Gap Inc says it is moving in the right direction when it comes to improving its revenues and earnings in the year ahead.

The San Francisco based retailer says boosting its business in North America remains a "top priority" and on top of changes already coming through to its stores in terms of new designs, better quality and more colourful ranges, it also plans to invest more to support growth in the region.

"As we enter 2012...we're going to have a focus on putting some money back into our domestic business in three key areas: in product, in marketing, and in e-commerce," chief executive officer Glenn Murphy told analysts on a conference call yesterday (23 February).

The retailer has long lamented the lack of growth in its showing growth in its North American units, with occasional hits overshadowed by misses on the product front, especially women's wear.

Indeed, comparable sales at its Gap North American stores fell 3% in the three months to 28 January and 4% in the year. Sales were also down 6% at Old Navy in the quarter, and were flat at Banana Republic.

So it hopes that investing wisely will help win back customers, not only by improving the products in its stores, but also telling shoppers about the changes it is making.

Part of this is also in preparation for "tailwinds" in the cost of goods in the second half of 2012, with the retailer wanting to be sure its business is shored up in categories where it can dominate. This will be helped by "giving our designers and merchandisers a little bit of license to put some more money back into the product," Murphy notes.

He adds that getting the right garment fit, colour and style "doesn't cost any more money," but "putting some money back into fabric does make strategic sense to us."

He adds: "We need to have consistent product execution every quarter, every year across all our brands," noting that the addition of former Nike and Uniqlo executives Jill Stanton and Tracy Gardner to the Gap and Old Navy teams will bridge the design and merchandising teams.

Raft of changes
Changes the retailer has already put into place over the last year include a shakeup of the North American management team which saw president Marka Hansen replaced with Art Peck, former head of the outlet division, as the Gap unit's boss.

And last May the chain parted company with design director Patrick Robinson. It also established a Global Creative Center in New York City to bring together design, marketing and production in one hub.

In October it revealed plans to close nearly 200 Gap stores in North America by the end of fiscal 2013, bringing the roster down by more than 20% to 700, and focus instead on international expansion. The retailer currently has 3,263 stores around the world.

But among the less publicised moves have been adjustments to the supply chain, which have seen the distribution and logistics team merge with the sourcing team to create one supply chain team, led by Colin Funnell, the executive vice president of supply chain.

The next step here is to move from a geographically based hub structure to category teams who will execute product, sourcing, negotiations and vendor relations on a category basis starting with product for this year's holiday season.

As well as investing at home, Gap Inc is also ramping up its international expansion in 2012.

The company already operates stores in 39 countries, with its International and Direct divisions together accounting for 26% of net sales last year. Among its goals are plans to triple the number of Gap stores in China from about 15 as of the end of last year to around 45 by the end of this year.

Capital expenditures in fiscal 2012 are set to rise by around 10% to $600m, with 125 company-operated stores due to open - 55 of which are international. And a long-term plan to support this growth is the creation of a brand new, global IT platform.

The plans were announced as Gap Inc booked a 40.3% drop in fourth quarter profit to $218m, as net sales slipped 2.3% to $4.3bn and comparable sales (which include online sales) fell 4%. Higher costs contributed to a 540 basis points drop in quarterly gross margin to 32.8%.

For the full year, net income tumbled 17% to $833m, as sales fell 1% to $14.5bn, and comparable sales dropped 4%.