The Gap logo is displayed at a Gap store on April 25, 2023 in Los Angeles, California.
Mario Tama | Getty Images
Gap reported one other quarter of net losses and declining sales across its 4 brands however the retailer insisted it’s making progress — and has managed to significantly improve its margins, which sent shares surging in prolonged 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 lack 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 corporate’s net loss narrowed to $18 million, or 5 cents per share, from $162 million, or 44 cents a share, within the year-earlier period. On an adjusted basis, the corporate reported earnings of $3 million, or 1 cent per share.
Sales dropped to $3.28 billion, down 6% from $3.48 billion a 12 months earlier.
Shares jumped greater than 15% in after-hours trading on the advance in gross margins.
Gap, which incorporates its namesake brand, Old Navy, Banana Republic and Athleta, has been with out a CEO for nearly a 12 months because it worked to restructure the business, understand its customers higher and get back to profitability.
The retailer said that work is well underway — and acknowledged it has long been needed.
“Consistent with what you have heard from us over the previous couple of quarters, we proceed to take the vital 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’ve got surfaced these issues before, and what I might say is just this work has been derailed for much too long and it’s imperative that we get after it in earnest,” he said.
Last month, Gap told investors it is going to lay off about 1,800 employees, greater than thrice as many as the five hundred layoffs it announced in September, as a part of a broad effort to chop costs and streamline operations.
Between this 12 months and last, the corporate has cut 25% of its headquarters roles, which has increased the variety of direct reports each manager has from two to 4 and reduced management layers from 12 to eight, the corporate said.
The cuts remove layers of red tape and bureaucracy that may allow Gap to be more nimble in its decision-making and focused on its creative efforts, the corporate said.
In March, it also announced a serious leadership shake-up. Athleta CEO Mary Beth Laughton left the corporate and its chief growth officer role was eliminated. Gap announced its chief people officer Sheila Peters would even be leaving, albeit at the top of the 12 months.
During an earnings call with investors, Martin said the seek for a recent CEO continues, but he didn’t share a timeline of when the job can be filled.
“After I took the role of interim CEO in July, I didn’t expect to still be talking to you in our first-quarter earnings call,” said Martin. “But this only underscores how strongly the board is committed to appointing the precise person as our next CEO, one which has passion, strong vision and customer obsession that may take this company forward.”
Martin said previously the subsequent chief executive will probably be an external candidate.
In its most up-to-date quarter, comparable sales were down 3% and store sales decreased 4% in comparison with last 12 months.
Online sales, which represented 37% of total net sales, also dropped 9% 12 months over 12 months, but the corporate said that was as a result of the incontrovertible fact that sales trends are getting more in step with pre-pandemic metrics. But digital sales are up 39% in comparison with the fiscal first quarter of 2019, the corporate added.
Within the year-earlier period, many retailers were still battling pandemic-related supply chain issues and it landed Gap with a glut of inventory the corporate had trouble selling since it was out of season or out of favor.
Gap, like other retailers, relied on promotions to clear that inventory, particularly at Old Navy, but in its most up-to-date quarter, it was capable of hold the road on discounts — and profit from reduced air freight expenses which have led to raised margins for retailers across the industry.
Gross margins increased by 5.6 percentage points 12 months over 12 months to 37.1%, and improved on the prior quarter, too, when margins were 33.6%.
The corporate 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 nearly all 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, however the gains were offset by softness in lively and children 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 12 months over 12 months, and a 1% increase in comparable sales. Much like Old Navy, the eponymous banner also saw strength in its women and baby categories, and softness in activewear and children. Sales were also affected by Gap store closures, the corporate said.
- Banana Republic saw $432 million in sales, down 10% 12 months over 12 months. The corporate attributed the drop to an “outsized” 24% jump in sales within 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 remains to be missing the mark relating to what consumers are searching for. Net sales were right down to $321 million, an 11% drop 12 months over 12 months, and comparable sales were off 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 can be continuing to enhance its inventory levels, which were down 27% within the quarter at $2.3 billion in comparison with a 12 months ago.
The corporate remains to be having promotions and discounts, but they are not denting margins like they were now that the inventory is cleaned up, said Gap finance chief Katrina O’Connell.
“The reduction in inventory has really allowed us to wash up the markdown piece of the business, which does not add numerous customer value, right? That is just inventory that last 12 months wasn’t responded to well by the patron and we needed to sell through given excess inventory, the improper inventory,” O’Connell said on an earnings call.
“The margin advantages coming from cleansing up that markdown, what that is allowing us to do remains to be promote, which is a greater solution to offer value to the patron, which remains to be vital right now.”
Across its brands, Gap has been conducting research to raised understand its consumers so it may deliver products they need, regain market share and reverse the sales slumps.
Gap’s full-year outlook was largely unchanged from the forecast it gave in March. The corporate is expecting second-quarter net sales to diminish within the mid- to high single-digit range.
For the complete 12 months, it continues to expect net sales to be down within the low to mid-single-digit range.
The outlook is partly affected by the corporate’s sale of Gap China. Within 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 may also include a 53rd week, which is predicted to spice up sales by $150 million.
Gap expects gross margin to proceed to rise and capital expenditures to return right down to $500 million to $525 million, in comparison with a previous range of $500 million to $550 million. The drop is driven by a call to open about five fewer Old Navy and Athleta stores through the fiscal 12 months.
The corporate plans to open a net 25 to 30 Old Navy and Athleta stores within the fiscal 12 months, a 3rd of which will probably be Old Navy. It expects to shut 50 to 55 Gap and Banana Republic outposts, greater than half of which will probably be Gap.
Read the full earnings release.