Gap posted a better-than-expected fiscal third quarter on Thursday, but the apparel retailer still appears cautious ahead of the holiday season as it works to reverse slowdowns at Banana Republic and Athleta.
The company, which also runs Old Navy and its namesake banner, far exceeded Wall Street’s estimates for profit and same-store sales, but only reaffirmed its full-year guidance and expects holiday-quarter sales to be flat to slightly negative.
Shares of Gap soared more than more than 30% on Friday, giving it a market cap of $6.6 billion. Year to date, they’re up nearly 60%.
Here’s how Gap performed during the quarter compared with what Wall Street was anticipating, based on a survey of analysts by LSEG, formerly known as Refinitiv:
- Earnings per share: 59 cents, adjusted vs. 19 cents expected
- Revenue: $3.77 billion vs. $3.60 billion expected
The company’s reported net income for the three-month period that ended Oct. 28 was $218 million, or 58 cents per share, compared with $282 million, or 77 cents per share, a year earlier. Excluding costs associated with its restructuring, Gap reported earnings of 59 cents per share.
Sales dropped to $3.77 billion, down about 7% from $4.04 billion a year earlier.
Gap hasn’t managed to reverse its ongoing revenue slump, but its same-store sales were far better than expected. They dropped only 2%, compared with the 8.7% slowdown that analysts had expected, according to StreetAccount.
For the third quarter in a row, Gap also saw improvements in its gross margin thanks to lower commodity costs, fewer promotions and a series of cost-cutting initiatives that have been underway for several quarters. Those moves include sweeping layoffs that cut more than 2,000 jobs.
During the quarter, Gap’s gross margin improved by 3.9 percentage points to 41.3%, which came in ahead of the 38.9% that analysts had anticipated, according to StreetAccount. The company said it expects gross margins to continue to improve.
The longtime apparel giant has been on a quest to improve sales and regain the relevancy that once defined the company. It recently tapped former Mattel executive Richard Dickson to be its chief executive. Dickson, who was credited with reviving the Barbie franchise during his time at the toy company, plans to use his branding prowess to turn Gap around and position the company back into the mainstream of popular culture.
“Gap Inc. has weathered a lot of disruption over the last several years, both external macro factors, as well as execution missteps and strategically well intended initiatives have impacted the company. All that said, the opportunity is clear,” Dickson said on an earnings call with analysts, his first as Gap’s CEO. “I have conviction that we can reinvigorate our portfolio brands, while we lead a creative culture that attracts, retains and develops the best talent in the industry. I’m encouraged by the early progress we’ve made to date, but we have a long way to go and a lot of work to do.”
Gap saw modest improvements at Old Navy and its eponymous banner. But Banana Republic and Athleta have been dragging on the retailer’s overall performance, which is part of the reason it only reaffirmed its full-year guidance and offered a tepid forecast for its holiday quarter.
During its fourth quarter, Gap expects sales to be flat to slightly negative compared with last year, which is a bit shy of the 0.3% increase that analysts had expected, according to LSEG.
“We have work to do, I think, still at Banana and Athleta, as demonstrated by the performance in the quarter,” finance chief Katrina O’Connell told CNBC in an interview. “So our revenue outlook for Q4 shows that difference in brand outcomes as we think about continued strength in Old Navy and Gap but maybe a longer turn at Banana and a little bit more work to do to reset Athleta.”
Dickson called Gap’s holiday outlook “balanced” and told analysts it takes into account “the uncertain consumer environment.”
Here’s a closer look at each brand’s performance:
- Old Navy: Sales at the discount brand came in at $2.13 billion, accounting for more than half of Gap’s overall revenue during the quarter. Sales fell 1% compared with last year, while comparable sales rose 1%. The brand saw strength in women’s and kids, and an uptick in activewear. Still, it has more work to do to improve product assortment and develop a pricing strategy that “clearly communicates jaw-dropping value” to win over cash-strapped families, said Dickson.
- Gap: Revenue at Gap’s eponymous banner was $887 million, a 15% drop compared with last year. The brand is still reeling from the shutdown of Yeezy Gap and saw comparable sales decline 1%. It saw strength in women’s and baby apparel. Dickson noted Gap has massive brand awareness but has been “far too quiet in the cultural conversation.” He said the company needs to “reignite that dialogue, offering confident, trend-right assortments, priced right and expressed through big ideas and culturally relevant messaging.”
- Banana Republic: Sales at Banana, known for its workwear and going out pieces, fell 11% compared to last year to $460 million. Comparable sales dropped 8%. The company said the brand is working to acquire new, high-value customers and reposition itself as a leading premium retailer after relying heavily on promotions over the last few years. Dickson expects Banana could become a big player in the wildly popular “quiet luxury space.”
- Athleta: Gap’s activewear brand was the worst performer during the quarter. Sales came in 18% lower than last year at $279 million, while comparable sales fell a staggering 19%. The company is still working to improve Athleta’s product assortment and get back in touch with its core customer. When discussing the brand’s performance, Dickson bluntly called it “disappointing” and said a series of misfires have left it “off track.” However, recent changes to marketing strategies have shown promising results.
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