Gap It reported mixed results Thursday and disappointing guidance for the current quarter as the mall retailer has long warned of an “uncertain consumer” and posted another quarter of declining sales across all four of its brands.
The company expects net sales to fall in the low double-digit range for the fiscal third quarter compared to last year’s net sales of $4.04 billion. Analysts had expected third-quarter sales to decline by 6.8%, according to estimates compiled by Refinitiv.
For the three-month period ending July 29, the gap beat Wall Street’s estimates for the bottom line but was below the peak.
Here’s how the apparel retailer fared in the fiscal second quarter compared to what Wall Street was expecting, based on a survey of analysts by Refinitiv:
- Earnings per share: 34 cents, adjusted, For an expected 9 cents
- Revenue: $3.55 billion Against the expected $3.57 billion
The company’s reported net income for the quarter was $117 million, or 32 cents per share, compared to a loss of $49 million, or 13 cents per share, in the previous year. Excluding one-time restructuring costs, Gap reported net income of 34 cents per share.
Sales decreased 8% to $3.55 billion, compared to $3.86 billion in the prior year, representing a sharp decline in sales year-over-year compared to the first fiscal quarter. On a two-year basis, revenue decreased by 15.7%.
Gap’s business has been under pressure for several quarters as it struggles to hold on to market share and regain the relevance it once established against a difficult macroeconomic backdrop.
During a call with analysts, the executives repeatedly talked about the “weak apparel environment,” the “volatile consumer market,” and the target consumer under “stress.”
It feels acute pressure on its largest revenue engine, Old Navy, as its low-income clients cut back on spending amid soaring inflation, interest rates and the imminent resumption of student loan payments.
“We are all very aware of the mixed economic data and uncertain consumer trends in the market, including the new dynamic with regard to student loan repayments starting in the third quarter,” Chief Financial Officer Katrina O’Connell said on a call with analysts. “As a result, we continue to be cautious in our approach to planning in light of the uncertain macro environment and volatile consumer background.”
Sales were down 6% at Old Navy, in addition to a sharp decline of 13.6% in the year-ago period.
“Old Navy’s primary family shopper is under a lot of financial stress and has cut spending, but not near that much. That means part of Old Navy’s problem is that shoppers are ripping off to buy clothes elsewhere,” said the retail analyst and managing director of GlobalData. Neil Saunders on the results. While some of this is a result of people looking for lower-priced alternatives, others are also a result of Old Navy’s boring ranges and styles.
“In our view, the brand has lost its edge and is producing more of the same season after season, rather than being driven by trends,” he added. “This, coupled with the more cautious consumer, is a losing combination.”
Across the business, same-store sales fell 6% during the quarter, while analysts had expected similar sales to decline 4.4%, according to StreetAccount.
Gross margins, which had expanded over the last two quarters, rose 3.1 percentage points to 37.6%, Gap said, thanks to lower air freight costs and slower discounts. It expects gross margins to continue to grow throughout the fiscal year.
In the middle of Gap’s fiscal year, the retailer expects full-year sales to fall in the mid-single-digit range from a year ago, which is in line with what analysts expected, according to Refinitv.
The report comes two days after Richard Dixon’s term The new CEO of Gap. the previous Mattel The CEO, who began his new role on Tuesday, is a branding expert who has overseen Mattel’s Barbie franchise. Gap is betting that Dixon can breathe new life into Gap’s brands: its namesake logo, Old Navy, Banana Republic and Athleta.
All four brands, which have vastly different lineups and customer bases, have seen this quarter after quarter of declining sales and this trend continued.
Here’s a closer look at their performance during the second fiscal quarter:
Old Navy: The affordable apparel retailer saw sales and comparable sales decline 6% to $1.96 billion. The target customer, the lower-income consumer, shopped less during the quarter and sales were slow in its active segment. The brand has seen bright spots in women’s shirts, knit bottoms, and rises in men’s and kids’ apparel.
gap: The banner bearing its name saw sales drop 14% to $755 million compared to the same period last year. The brand was pressured by the closure of Yeezy Gap and the sale of Gap China. Sales were strong in the women’s category but were offset by store closures in North America. Comparable sales decreased by 1%.
Banana Republic: Sales were down 11% to $480 million year-over-year while comparable sales were down 8%. The brand is growing significantly compared to past quarters when it saw a spike in demand from shoppers who suddenly needed clothes for work and out again after the Covid pandemic subsided. The brand is in transition and recently launched a homewares category that includes luxury bedding, rugs and décor with more to come this fall.
Athlete: The sportswear brand saw $341 million in sales. And while revenues were down just 1% compared to the same period last year, comparable sales were down 7%. For the third quarter in a row, Gap has fallen short of what Athleta customers were looking for, as the brand continues to search for the right product suite. She recently appointed Chris Blakeslee as CEO. Most recently, he served as President of Athleta’s competitor Alo Yoga and sister company Bella+Canvas.
“We’re seeing encouraging signs of progress, as our teams streamline the way we work so we can focus on initiatives that drive growth,” Dixon said in a press release. “That means we have to do things differently, with a clear focus on redefining what our brands mean to consumers, focus on creativity, design for fit as an endeavour, not a goal, and build on our remarkable heritage to shape an exciting new future.”
O’Connell said those signs of progress include a “fairly good” start to back-to-school shopping and a 29% year-over-year decline in inventories.
Despite slowing sales across Gap’s brands, the CFO insisted that streamers either “maintained or gained share” during the quarter, buoyed by strength in the women’s category.
“We know that no matter the market conditions, it’s the strong brands, the brands that matter, that win,” O’Connell said. “So we continue to focus on the tools and opportunities available to us to provide services on behalf of our customers, employees and shareholders.”
The new CEO
During his first earnings call as CEO of Gap, Dixon spoke repeatedly about the importance of retailer brands and how he would focus his efforts on reviving them.
“Our brands are important, but they could be more important,” Dixon said.
“With my experience on the board, and certainly on the ground for three days in a row, our teams are incredibly creative and they’re all engaged in this. They differentiate and enhance our brands, focus on design, care about customers and ultimately be culturally relevant.”
However, he acknowledged that “restructuring is challenging” and that change will not come quickly.
Gap boss Bob Martin, who served as interim CEO for more than a year before Dixon was hired, has been working to restructure both its business and management organization so that the new CEO can start right on his arrival.
Over the past year, a gap has occurred Laying off more than 2,000 employees, or about 25% of its corporate roles, increasing the number of direct reports per manager from two to four and reducing layers of management from 12 to eight, the company previously reported. The cuts are designed to remove layers of red tape and bureaucracy to make Gap smarter in its decision-making and more focused on its creative efforts.
The layoffs are saving Gap about $300 million, the first half of which will come in fiscal 2023. During the quarter ended April 29, Gap margins increased 5.6 percentage points year over year to 37.1%. The news sent its shares higher in aftermarket trading despite another quarter of declining sales.