A Gap store in New York, USA, on Monday, May 27, 2024.
Stephanie Keith | Bloomberg |
Gap raised its full-year earnings forecast on Thursday after the company reported better-than-expected results at its biggest brand, Old Navy.
The clothing company's second-quarter results were released earlier than planned after the company “accidentally” posted them on its website and then removed them, a Gap spokesperson told CNBC.
“As soon as the error was discovered, we notified the NYSE and trading in our shares was temporarily suspended,” the spokesman said, adding that the results were released “due to an administrative error.”
Gap's stock price was suspended just before 10:00 a.m. ET. The company then released its quarterly results at 11:12 a.m. ET. Following the release, shares rose more than 2% after being suspended for most of the morning.
Here's what the company reported compared to Wall Street expectations, according to an analyst survey by LSEG:
- Earnings per share: 54 cents compared to expected 40 cents
- Revenue: $3.72 billion compared to expected $3.63 billion
The company's net income for the three-month period ended Aug. 3 nearly doubled from the same period a year ago. Gap reported earnings of $206 million, or 54 cents a share, compared with $117 million, or 32 cents a share, a year earlier.
Revenue rose to $3.72 billion, up about 5% from $3.55 billion in the same period last year.
For the full year, Gap now expects gross margin to be two percentage points higher than previously forecast (at least 1.5 percentage points). The company also expects operating profit to increase by about 50 percent. Previously, it had expected an increase of just over 40 percent.
Over the past year, Gap has worked to turn its business around, reversing a sales slump and, under the leadership of CEO Richard Dickson – the former Mattel Manager credited with reviving the Barbie empire.
Since Dickson took the helm, sales at the company's four brands – Banana Republic, Old Navy, Athleta and its namesake company – have rebounded and the company is finding its voice among its peers again. In addition to sales and relevance, Gap's profit 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, up 59% year over year.
Although the second quarter results did not exceed expectations, they represent a significant improvement compared to the previous year.
“We've really focused on our strategic priorities, and the top priority has been to maintain financial and operational rigor, which, as far as we can define it, becomes the foundation of how we operate and drives better processes and cultural accountability,” Dickson said in an interview with CNBC.
“The revitalization of our brands is made possible by financial and operational discipline, and you see it. You see it in the results, you see it in our stores. You see it on our websites,” he added.
“We're building stronger brand identities. They're supported by on-trend products,” Dickson said. “We're reinforcing these with better storytelling. Our media mix has become much more innovative and in general I'm proud of the brand's portfolio work in the context of cultural relevance.”
According to StreetAccount, comparable sales rose 3 percent in the quarter, in line with analysts' expectations of 3.1 percent growth. According to StreetAccount, the gross margin was better than forecast at 42.6 percent and above the 40.8 percent expected by analysts.
Here’s a closer look at each brand’s performance:
Old Navy
Revenue rose 8% to $2.1 billion, with comparable sales up 5%, better than the 4.3% growth expected by analysts, according to StreetAccount. The company has worked to improve its assortment and ensure its offerings are not only affordable but also fashionable.
“We have upped our fashion quotient, so to speak,” Dickson said. “Alongside a much more disciplined approach with financial and operational rigor, we are now ramping up our efforts and seeing the results of our renewal strategy.”
As consumers feel the brunt of inflation and high interest rates, many have switched to cheaper alternatives. Dickson says Old Navy is seeing “growth across all income groups.”
“If there's a perceived flight to value, Old Navy is right in the middle of it,” Dickson said. “We're becoming the style authority and the brand in the value space, and so we're refocusing on our strategic approach, our strategic priorities. I think we're seeing the success of that.”
gap
Revenue at the namesake company rose 1% to $766 million in the quarter, with comparable sales up 3%, just below the 3.4% increase expected by analysts. As Dickson tries to restore cultural relevance to the company, that has helped the namesake company increase sales, he said.
Banana Republic
Gap's high-end workwear line has hurt the company's overall performance. Both revenue and comparable sales were flat year-over-year in the second quarter, compared to StreetAccount's estimate of a 0.5 percent increase. The company said it was working to “improve pricing and assortment” to improve the brand's performance.
“In some cases we have overreached, and in other cases we could build in a stronger value orientation to achieve greater economies of scale,” Dickson said when asked what the company is doing to improve its pricing.
“Our new merchandising strategies include expanding the variety of products in the store and finding the right mix, so to speak. And last but not least, it's about really improving fit. That's an important aspect of any brand, but particularly in the women's area of Banana Republic, it's a challenge that we're really focused on,” he said.
athlete
Sales at Gap's athleisure brand Athleta fell 1% to $388 million, while comparable sales fell 4%. The results were not comparable to analyst estimates.
Athleta, one of Gap's strongest brands during the pandemic, was in a downward spiral and a major drag 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 assortment and create more excitement for the line through new products and collaborations with athletes.
In a press release, the company stated that it expects Athleta to return to positive comparable sales growth for the remainder of the year.
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