Facade of GAP retail store with sign logo on sunny day, San Francisco, California, June 7, 2024.
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Gap raised its full-year earnings outlook on Thursday after seeing better-than-expected results at its biggest brand, Old Navy.
The apparel company’s fiscal second-quarter results were released earlier than planned after the company “inadvertently” posted them on its website and then took them down, a Gap spokesperson told CNBC.
“As soon as the error was discovered, we notified the NYSE and trading in our stock was temporarily halted,” the spokesman said, adding that the results were released “as a result of an administrative error.”
Gap stock was halted shortly before 10 a.m. ET. The company then released its quarterly results at 11:12 am. ET. After the release, shares rose more than 2% after being flat for much of the morning.
Here’s what the company reported, compared to what Wall Street expected, according to analysts surveyed by LSEG:
- Earnings per share: 54 cents vs. 40 cents expected
- Annuity: $3.72 billion vs. $3.63 billion expected
The company’s reported net income for the quarter ended Aug. 3 nearly doubled from the year-ago period. Gap posted a profit of $206 million, or 54 cents per share, compared with $117 million, or 32 cents per share, a year earlier.
Sales rose to $3.72 billion, up about 5% from $3.55 billion in the prior period.
For the full year, Gap now expects its gross margin to be 2 percentage points higher than the at least 1.5 percentage point rise it had previously forecast. It also expects its operating income to grow by about 50%. It had previously expected it to rise by just over 40%.
Over the past year, Gap has worked to turn around its business, reverse a sales slump and regain cultural relevance under the guidance of CEO Richard Dickson — the former Mattel executive credited with reviving the Barbie empire.
Since Dickson took over, sales have begun to turn around across the company’s four brands — Banana Republic, Old Navy, Athleta and its namesake banner — and the company is finding its voice again among its peers. Beyond sales and relevance, Gap’s earnings and balance sheet have also improved significantly under Dickson. The company ended the quarter with $2.1 billion in cash, cash equivalents and short-term investments, a 59% increase compared to last year.
The company’s second-quarter results fell short of expectations, but were solid improvements from where the company was a year ago.
“We really focused on our strategic priorities, and the first priority was maintaining the financial and operational rigor that becomes, as far as we can define it, the fabric of how we work and fosters better processes and cultural accountability. Dickson told CNBC in an interview.
“The revitalization of our brands is enabled by financial and operational rigor and you see it. You see it in the results, you see it in our stores. You see it in our websites,” he added.
“We are building stronger brand identities. They are supported by the right trending products,” said Dickson. “We’re amplifying these through better storytelling. Our media mix has become much more innovative, and overall, I’m proud of the brand portfolio’s work on cultural relevance.”
During the quarter, comparable sales rose 3%, in line with the 3.1% growth expected by analysts, according to StreetAccount. Its gross margin was better than forecast at 42.6%, versus the 40.8% analysts were expecting, according to StreetAccount.
Here’s a closer look at how each brand performed:
Old Navy
Sales rose 8% to $2.1 billion, with comparable sales up 5%, better than analysts had expected 4.3% growth, according to StreetAccount. The company is working to improve its range and ensure that the value proposition is not only low-cost but also fashionable.
“We were calling, if you will, our fashion quotient,” Dixon said. “In addition to really driving a much more disciplined approach with financial and operational rigor, we’re now dialing in and seeing the results of our revitalization strategy.”
As consumers feel the brunt of inflation and high interest rates, many have traded down to cheaper options, and Dickson said Old Navy is seeing “growth across all income cohorts.”
“With a supposed flight to value, Old Navy is there with a welcome layer,” Dickson said. “We’re becoming the style authority and the brand in the value space, and so again, we’re focusing on our strategic approach, our strategic priorities. I think we’re seeing the success of that.”
Gap
Revenue at Gap’s namesake banner rose 1% to $766 million during the quarter, with comparable sales rising 3%, just short of the 3.4% analysts expected. As Dickson tries to bring cultural relevance back to the company, the company’s namesake banner has helped boost sales, he said.
Banana Republic
Gap’s increased line of workwear has weighed on the company’s overall performance. Both revenue and comparable sales were flat in the second quarter compared to a year ago, versus StreetAccount estimates for a 0.5% increase. The company said it is working to “improve its pricing and collection” to turn around the brand’s performance.
“In some cases, we’ve been way ahead of ourselves and in other cases, we could add more value orientation to increase scale,” Dickson said when asked what work the company is doing to improve pricing.
“Some of our new merchandising strategies include in-store product depth, finding the right mix, if you will. And last but not least, really improving the fit, which is an important part of any brand, but in particular, it’s been a challenge in the women’s space at Banana Republic, where we are really focused,” she said.
Athletes
Sales at Gap’s Athleta athletic brand fell 1 percent to $388 million, with comparable sales down 4 percent. The results were not comparable to analysts’ estimates.
One of Gap’s strongest brands during the pandemic, Athleta was on a downward spiral and weighed heavily on the company’s performance until it appointed former Alo Yoga president Chris Blakeslee as CEO last summer. Since then, Blakeslee has worked to improve Athleta’s lineup and also worked to generate more excitement for the line with product drops and athlete partnerships.
In a press release, the company said it expects Athleta to return to positive comparable sales growth for the remainder of the year.