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, sending shares surging in aftermarket trading.
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 15% 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.
“Consistent with what you’ve heard from us over the last few quarters, we continue to take the necessary actions to drive critical change at Gap inc., to further improve the trajectory of our business and to get us back on a path to delivering consistent results,” interim CEO Bobby Martin told investors on an earnings call.
“I understand that we have surfaced these issues before, and what I would say is simply this work has been derailed for far too long and it is imperative that we get after it in earnest.”
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.
During an earnings call with investors, Martin said the search for a new CEO is ongoing but didn’t share a timeline.
“When I took the role of interim CEO in July I did not expect to still be speaking to you in our first quarter earnings call,” said Martin. “But, this only underscores how strongly the board is committed to appointing the right person as our next CEO, one that has passion, strong vision and customer obsession that will take this company forward.”
Martin said previously the next chief executive will be an external candidate.
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 39% compared to the fiscal first quarter of 2019, 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.
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 and baby categories, 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 and baby categories, and softness in activewear 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, including “misses” in color, print, pattern, silhouette and straying away from the brand’s “performance DNA.”
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.
Gap is still having promotions and discounts, but they’re not impacting margins as heavily now that the inventory is cleaned up, said Gap Chief Financial Officer Katrina O’Connell.
“The reduction in inventory has really allowed us to clean up the markdown piece of the business, which doesn’t add a lot of customer value, right? That’s just inventory that last year wasn’t responded to well by the consumer and we had to sell through given excess inventory, the wrong inventory,” O’Connell said on an earnings call.
“The margin benefits coming from cleaning up that markdown, what that’s allowing us to do is still promote, which is a better way to be offering value to the consumer, which is still important at this time.”
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.
Gap 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.
The company plans to open a net of 25 to 30 Old Navy and Athleta stores in the fiscal year, a third of which will be Old Navy. It expects to close 50 to 55 Gap and Banana Republic outposts, more than half of which will be Gap.
Read the full earnings release.
