SAN FRANCISCO (CBS/AP) — Gap Inc. reported a 12.5 percent drop in fourth-quarter profit on a 3 percent decline in revenue as the clothing retailer was forced to discount heavily over the holiday shopping season to entice customers.

The clothing chain, which operates Gap, Old Navy, Banana Republic and Athleta, also issued a profit outlook for the full year that’s below analysts’ expectations.

The results issued Thursday come after Gap, like many retailers, finished a brutal holiday season marked by heavy discounting to help attract shoppers who’ve been cautious in a still sluggish economy. Gap did its part by offering constant sales. Still, it’s faring better than other rivals like Abercrombie & Fitch, which reported on Wednesday a 58 percent drop in fourth-quarter profit on a 12 percent decline in revenue.

The results underscore the challenges that Gap faces in keeping the momentum going since enjoying a turnaround starting in early 2012. Gap has been stepping up its marketing and offering trendier merchandise. In 2012, the company also announced a management overhaul to help it respond more quickly to shifting tastes.

The San Francisco-based company is also increasingly responding to a shift among consumers to shop and research on mobile devices. For example, Gap is expanding a service that allows shoppers reserve items online and then pick up the merchandise at the store within 24 hours.

Still, Glenn Murphy, Gap Inc.’s CEO, told investors on a conference call Thursday that Gap, like other retailers, needs to combat the promotional environment by offering shoppers something new.

“We got to continue as a business to be innovative and creative and bring reasons for people to engage in our brands either online or in our stores that are not rooted in promotions and discounts with a frequency in which they’re rooted in today,” said Glenn Murphy, chairman and CEO of Gap.

The retailer earned $307 million, or 68 cents per share, in the three-month period ended Feb. 1. That compares with $351 million, or 73 cents per share, in the year-ago period, which included an extra week.

Revenue fell $4.58 billion from $4.73 billion.

Analysts were expecting earnings of 65 cents per share on revenue of $4.58 billion for the quarter, according to FactSet.

Revenue at stores opened at least a year — a key gauge of a retailer’s health — rose 1 percent.

Gap expects earnings per share in the range of $2.90 to $2.95 for the current year. Analysts had expected $3.02 per share, on average.

Gap also said its board authorized a 10 percent increase in its quarterly dividend. The company will pay out 22 cents per share on April 30 to shareholders of record April 9.

The retailer announced last week that it would raise the hourly wages of 65,000 of its hourly workers nationwide to $9 an hour this year and $10 an hour in 2015. Gap said it wanted to be able to better retain and attract the best talent in the business.

The chain declined last week to give an average wage for its employees, but said that the vast majority earn more than the federal minimum wage, $7.25.

Gap also declined to comment on how much the pay hike will cost the company, but said there are no plans for cuts in jobs or store hours or increases in prices to cover the costs.

President Barack Obama applauded the move by Gap, noting that in his State of the Union address last month, he had asked businesses to do what they can to raise wages. Obama has also signed an executive order raising the minimum wage for workers covered by new federal contracts to $10.10.

In after-hours trading, Gap shares traded at $43.36, down 32 cents, after slipping 23 cents to $43.68 in regular trading.

© Copyright 2014 The Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten or redistributed.

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