A general view of an Old Navy store.
Gap Inc.
Gap’s largest banner Old Navy returned to growth for the first time in more than a year during its holiday quarter as the retailer delivered earnings on Thursday that came in well ahead of Wall Street’s expectations.
Sales at Old Navy grew 6% to $2.29 billion, and Gap’s overall gross margin surged 5.3 percentage points to 38.9% thanks to fewer markdowns and lower input costs. Analysts had expected a gross margin of 36%, according to StreetAccount.
Shares of Gap jumped about 5% in extended trading following the report.
Here’s how the retailer did in its fourth fiscal quarter compared with what Wall Street was anticipating, based on a survey of analysts by LSEG, formerly known as Refinitiv:
- Earnings per share: 49 cents vs. 23 cents expected
- Revenue: $4.3 billion vs. $4.22 billion expected
The company’s reported net income for the three-month period that ended February 3 was $185 million, or 49 cents per share, compared with a loss of $273 million, or 75 cents per share, a year earlier.
Sales rose slightly to $4.3 billion, up about 1% from $4.24 billion a year earlier. Like other retailers, Gap benefited from a 53rd week during fiscal 2023 and without it, sales would’ve been down during the quarter. The extra week contributed about four percentage points of growth during the fiscal fourth quarter, the company said.
Comparable sales during the quarter were flat, compared to estimates of down 1.1%, according to StreetAccount. In-store sales were up 4% while online sales decreased 2% and represented 40% of total revenue.
The retailer decreased inventory by 16% during fiscal year 2023, and with those levels now in check, Gap is working to hold the line on promotions and drive full price selling.
During the quarter, Gap saw higher average selling prices across all of its brands, and it expects to grow its gross margin by at least a half percentage point in fiscal 2024.
“We were the authorities of taking on-trend basics, expressing it in ways that drove cultural conversations. At its best, we were a pop culture brand that did much more than sell clothes and as you know, we all know, we lost our edge. We devolved from a pop culture brand to a clothing retailer, and today we’re moving again,” CEO Richard Dickson told CNBC in an interview.
“We’re getting our vibe back.”
Staging a turnaround
Banana and Athleta lag
On the back end, Gap has made improvements in growing its gross margin and streamlining its cost structure, but it’s been grappling with a steep decline in sales across its four brands: its eponymous banner, Old Navy, Athleta and Banana Republic.
Gap and Old Navy have seen some signs of progress but Athleta and Banana Republic have been dragging on the overall business.
When it comes to Banana, Dickson told CNBC he is “encouraged by the brand’s aesthetic direction” but said it’s going to take time to build back its momentum.
“We gotta get really strong in fixing the fundamentals and strengthening these fundamentals in order to drive more consistent results,” said Dickson. “And that’s what we’re really going to be focused on, our day to day execution, building upon the insights that we’re learning.”
Athleta is still in a state of recovery after numerous leadership shifts and a number of missteps when it came to designing the right type of product in the right styles and colors. It’s also missed the mark in its stores and its marketing, said Dickson.
In August, Athleta named former Alo Yoga President Chris Blakeslee its next CEO, and Dickson said the brand has made strides since he’s come aboard.
“We started the year with a much cleaner palette and we’ve seen early successes in these new arrivals at full price and we’re getting encouraged by the consumer’s reaction,” said Dickson. “I really like where the team is going. We’ve got a new drop strategy, which they’ve been testing, there’s new innovation, color has started to enter the stores and reacted really well.”
Here’s a closer look at each brand’s performance during the fourth quarter:
- Old Navy: Sales were up 6% to $2.29 billion while comparable sales were up 2%, ahead of estimates of up 1%, according to StreetAccount.
- Gap: Sales were down 5% to $1.01 billion, weighed down by selling the brand’s China business, while comparable sales were up 4%, well ahead of estimates of down 1.3%, according to StreetAccount. The brand saw strength in the women’s category.
- Banana Republic: Sales were down 2% to $567 million were down 2% while comparable sales were down 4%, better than the 6.7% decline analysts had expected, according to StreetAccount. The company noted that Banana has made progress in “elevating its aesthetic” but re-establishing the brand “will take time and there is work to be done to better execute many of the fundamentals.”
- Athleta: Sales were down 4% to $419 million while comparable sales were down a steep 10%. Gap noted that Athleta’s performance improved compared to the prior quarter, but said sales are sluggish as the brand looks to hold the line on pricing and lap a prior period of elevated markdowns.
Correction: This story has been updated to correct the spelling of fashion designer Zac Posen’s name.