Gap shares jump after retailer reports big improvement in margins
The Gap logo is displayed at a Gap store on April 25, 2023 in Los Angeles, California.
Mario Tama | Getty Images
Gap reported another quarter of net losses and declining sales across its four brands but the retailer insisted it’s making progress – and has managed to significantly improve its margins.
Here’s how the apparel retailer did in its fiscal first quarter compared with what Wall Street was anticipating, based on a survey of analysts by Refinitiv:
- Earnings per share: 1 cent, adjusted, vs. a loss of 16 cents, expected
- Revenue: $3.28 billion vs. $3.29 billion expected
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For the three-month period that ended April 29, the company reported a loss of $18 million, or 5 cents per share, compared with a loss of $162 million, or 44 cents a share, in the year ago period. On an adjusted basis, the company reported earnings of $3 million, or 1 cent per share, in the period.
Sales dropped to $3.28 billion, down 6% from $3.48 billion a year earlier.
Shares of the company jumped more than 12% in after hours trading.
Gap – which includes its namesake brand, Old Navy, Banana Republic and Athleta – has been without a CEO for nearly a year as it worked to restructure the business, understand its consumers better and get back to profitability.
The company said that work is well underway but acknowledged it has long been needed. While it knew what the solutions were, those fixes have been delayed or derailed for too long and too many times, it said.
Last month, it told investors it will lay off about 1,800 employees, more than three times as many as the 500 layoffs it announced in September, as part of a broad effort to cut costs and streamline operations.
Between this year and last, the company has cut 25% of its headquarters roles, which has increased the number of direct reports each manager has from 2 to 4 and reduced management layers from 12 to 8, the company said.
The cuts remove layers of red tape and bureaucracy that will allow Gap to be more nimble in its decision making and focused on its creative efforts, the company said.
In March, it also announced a major leadership shakeup. Athleta CEO Mary Beth Laughton left the company and its chief growth officer role was eliminated. Gap announced its chief people officer Sheila Peters would also be leaving, albeit at the end of the year.
In its most recent quarter, comparable sales were down 3% and store sales decreased 4% compared to last year.
Online sales, which represented 37% of total net sales, also dropped 9% year over year, but the company said that’s because sales trends are getting more in line with what’s historically normal after the Covid pandemic led to an industry-wide jump in ecommerce. Digital sales are up “significantly” to pre-pandemic levels, the company said.
In the year ago period, many retailers were still battling pandemic-related supply chain issues and it landed Gap with a glut of inventory they had trouble selling because it was out of season or out of style.
Many, like Gap, relied on promotions to clear that inventory, particularly at Old Navy, but in its most recent quarter, it was able to hold the line on discounts – and benefit from reduced air freight expenses that has led to better margins for retailers across the industry.
Year over year, gross margins increased by 5.6 percentage points year-over-year to 37.1%. They also improved sequentially from its last quarter where margins were 33.6%.
The company attributed the bump in margins to lower air freight expenses and a slowdown in discounting, which was partially offset by ongoing inflationary costs.
Gap is also continuing to improve its inventory levels, which were down 27% in the quarter at $2.3 billion compared to the year ago period.
How Gap’s brands fared
- Old Navy, which accounts for the majority of Gap’s revenue, saw net sales drop 1% to $1.8 billion and comparable sales down 1%. Sales were strong in its women’s category, but the gains were offset by softness in active and kids and an ongoing slowdown in consumer demand. Old Navy, which caters to a lower-income consumer, is more vulnerable to macroeconomic conditions.
- Gap reported $692 million in sales, a 13% drop year over year, and a 1% increase in comparable sales. Similar to Old Navy, the eponymous banner also saw strength in its women’s category and softness in active and kids. Sales were also impacted by Gap store closures, the company said.
- Banana Republic saw $432 million in sales, down 10% year over year. The company attributed the drop to an “outsized” 24% jump in sales in the year ago period that was driven by a shift in consumer preferences as many returned to work and going out following Covid lockdowns. Comparable sales were down 8%.
- Athleta is still missing the mark when it comes to what consumers are looking for. Net sales were down to $321 million, an 11% drop year over year, and comparable sales were down 13%. The sales dip was attributed to ongoing product acceptance challenges.
Across its brands, Gap has been conducting research to better understand its consumers so it can deliver products they want, regain market share and reverse the sales slumps.
Gap’s full-year outlook was largely unchanged from the forecast it gave in March. The company is expecting second quarter net sales to decrease in the mid to high-single digit range.
For the full year, it continues to expect net sales to be down in the low to mid-single digit range.
The outlook is partly impacted by the company’s sale of Gap China. In the fiscal second quarter of 2022, net sales included $60 million from Gap China, and in fiscal 2022, it included $300 million in sales.
Fiscal 2023 will also include a 53rd week, which is expected to boost sales by $150 million.
The company expects gross margin to continue to rise and capital expenditures to come down to $500 million to $525 million, compared to a prior range of $500 million to $550 million. The drop is driven by a decision to open about 5 fewer Old Navy and Athleta stores during the fiscal year.
Read the full earnings release.
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