Hole GPS Q1 Earnings Report 2023

The Gap logo is on display at a Gap store in Los Angeles, California on April 25, 2023.

Mario Tama | Getty Images

gap reported another quarter of net losses and falling sales at its four brands, but the retailer insisted it was making progress — and was able to significantly improve its margins, sending shares higher in extended trading.

Here’s how the apparel retailer fared in the fiscal first quarter versus Wall Street expectations, based on a Refinitiv analyst poll:

• Earnings per share: 1 cent adjusted versus an expected loss of 16 cents
• Revenue: $3.28 billion versus $3.29 billion expected

For the three-month period ended April 29, the company’s net loss narrowed to $18 million, or 5 cents a share, compared to $162 million, or 44 cents a share, in the same period last year. On an adjusted basis, the company reported earnings of $3 million, or 1 cent per share.

Revenue fell to $3.28 billion, down 6% from $3.48 billion a year earlier.

Shares are up more than 15% in after-hours trading on improving gross margins.

Gap, which owns the eponymous brands Old Navy, Banana Republic and Athleta, has been without a CEO for almost a year as it works to restructure the company, better understand its customers and become profitable again.

The retailer said the work is well underway – and acknowledged it has been a long time coming.

“Consistent with what you have heard from us over the past few quarters, we continue to take the necessary actions to drive critical change at Gap Inc., continue to improve the evolution of our business and put us back on the path to fulfillment “Consistent results,” interim CEO Bobby Martin told investors on a earnings call.

“I understand that we’ve raised these issues before, and I would say that this work has just stalled for far too long and it’s imperative that we address them seriously,” he said.

Last month, Gap told investors the company would lay off about 1,800 employees, more than triple the 500 layoffs announced in September, as part of a broader effort to cut costs and streamline operations.

Between this year and last, the company has cut 25% of its head office jobs, increasing the number of direct reports per manager from two to four and reducing management tiers from 12 to eight, the company says.

The cuts will eliminate red tape and bureaucracy, allowing Gap to be more flexible in decision-making and focus on its creative endeavors, the company said.

A major leadership change was also announced in March. Athleta CEO Mary Beth Laughton left the company and the role of Chief Growth Officer was eliminated. Gap announced that its chief human resources officer, Sheila Peters, will also leave the company, but by the end of the year.

During a conference call with investors, Martin said the search for a new CEO is ongoing, but didn’t provide a timeline for filling the position.

“When I took on the role of interim CEO in July, I didn’t expect to be speaking to you again on our first-quarter earnings call,” said Martin. “But this only underscores the Board’s commitment to appointing the right person as our next CEO, someone with passion, strong vision and customer focus who will drive this company forward.”

Martin previously said the next CEO will be an outside candidate.

In its most recent quarter, comparable sales declined 3% and store sales declined 4% year-over-year.

Online sales, which accounted for 37% of total net sales, also fell 9% year over year, but the company said this was due to sales trends becoming more consistent with pre-pandemic metrics. But digital sales are up 39% compared to the first fiscal quarter of 2019, the company added.

In the year-ago period, many retailers were still grappling with pandemic-related supply chain issues, and Gap ended up with an oversupply of inventory that the company was struggling to sell because it was out of season or out of style.

Gap, like other retailers, relied on promotions to clear inventory, particularly at Old Navy, but last quarter the company was able to stay in line with price cuts — and benefit from lower air freight costs that have translated into better margins for retailers out of the entire industry.

Gross margins increased 5.6 percentage points year-over-year to 37.1% and also improved sequentially when margins were 33.6%.

The company attributed the increase in margins to lower air freight costs and a slowdown in discounts, partially offset by continued inflationary costs.

How Gap’s brands have fared

• Old Navy, which accounts for the majority of Gap’s revenue, saw net sales decline 1% to $1.8 billion and comparable sales decline 1%. Sales in the women’s and baby categories were strong, but gains were offset by a decline in active and children’s goods and a continued slowdown in consumer demand. Old Navy, which caters to low-income consumers, is more vulnerable to macroeconomic conditions.

• gap reported revenue of $692 million, down 13% year-on-year and comparable revenue up 1%. Similar to Old Navy, the eponymous banner featured strength in the women’s and baby categories, and softness in the activewear and kids categories. Sales were also impacted by the closure of Gap stores, the company said.

• Banana Republic reported revenue of $432 million, down 10% year-on-year. The company attributed the decline to an “outsized” 24% jump in sales in the year-ago period, which it said was due to a shift in consumer preferences as many returned to work and went out following the coronavirus lockdowns. Comparable sales declined 8%.

• athlete is still lagging behind when it comes to what consumers are looking for. Net sales declined to $321 million, down 11% year over year, and comparable sales declined 13%. The decline in sales was attributed to ongoing product acceptance challenges, including “faults” in colour, print, pattern, silhouette and deviations from the brand’s “performance DNA”.

Gap continues to improve its inventories, which fell 27% year over year to $2.3 billion in the quarter.

The company is still offering promotions and price cuts, but they’re not weighing on margins as much as they are now that inventories have been cleared, Gap chief financial officer Katrina O’Connell said.

“Reducing inventory has really allowed us to clean up the markdown part of the business that doesn’t add much value to the customer, has it? That’s just inventory that the consumer hasn’t responded well to over the past year, and that’s what we’ve had. “Given the excess inventory, selling the wrong inventory,” O’Connell said on a earnings call.

“The margin benefits resulting from the adjustment of this discount allows us to continue to advertise which is a better way to deliver value to the consumer, which is still important at this time.”

Across its brands, Gap has conducted research to better understand its consumers so the company can deliver the products they want, regain market share, and reverse revenue declines.

Gap’s full-year outlook was broadly unchanged from the guidance provided in March. The company expects second-quarter net sales to decline in the mid- to high-single digits.

A decline in sales in the low to mid-single-digit range is still expected for the year as a whole.

The outlook is partially impacted by the company’s sale of Gap China. In the second fiscal quarter of 2022, net sales included US$60 million from Gap China, in fiscal 2022 it was US$300 million in sales.

Fiscal year 2023 will also feature a 53rd week, which is expected to increase sales by $150 million.

Gap expects gross margin to continue increasing and capex to decrease to $500-$525 million compared to a previous range of $500-$550 million. The decline is due to the decision to open about five fewer Old Navy and Athleta stores during the fiscal year.

The company plans to open 25 to 30 net Old Navy and Athleta stores in the fiscal year, a third of which will be Old Navy. It is expected that 50 to 55 Gap and Banana Republic outposts will be closed, more than half of which will be Gap.

Read the full results announcement.