Holiday shoppers take part in early Black Friday shopping deals at the Gap store in New York’s Times Square.
Brendan McDermid | Reuters
Hole Thursday beat Wall Street’s quarterly revenue expectations, but gave a cautious outlook for the holiday season.
The apparel retailer, which also includes its namesake brand Banana Republic and Athleta, expects total net sales to decline by an average of several digits on an annualized basis in the fourth quarter of fiscal 2022.
Chief Financial Officer Katrina O’Connell said that while the company made progress in reducing its inflated inventory, it “will continue to take a cautious approach in light of the uncertain consumer and increasingly promotional environment as we look to the rest of fiscal 2022.”
Shares of the company were up about 6% in extended trading on Thursday.
Here’s how the retailer performed during the three-month period ending Oct. 29:
- Profit per share: 71 cents adjusted
- Revenue: $4.04 billion versus $3.8 billion expected, according to Refinitiv consensus estimates.
Wall Street expected Gap to break even per share, but it was not immediately clear whether the reported earnings per share were comparable to estimates.
Gap’s net income rose to $282 million, or 77 cents per share unadjusted, a dramatic improvement from a net loss of $152 million, or 40 cents per share, in the same period last year. Revenue increased 2% to $4.04 billion from $3.94 billion in the same quarter in 2021.
Total company comparable store sales, which track sales online and in stores open for at least 12 months, were up 1% compared to the same period a year ago. Analysts had expected a 3.2% drop in comparable store sales, according to StreetAccount estimates.
Here’s a closer look at each division:
- Gap’s eponymous brand, known for denim and basics: comparable store sales increased 4% globally and remained flat in North America. The company said it was in better shape with inventory but had weaker sales in the children and infant categories.
- Old Navy, known for casual clothing for adults and children: comparable store sales decreased by 1%. The brand saw weaker demand for baby and children’s wear and was hurt by low-income consumers feeling stretched by inflation.
- Banana Republic, known as a destination for costumes and dresses: comparable store sales increased by 10%. It is looking for a new direction after the pandemic has disrupted the typical fashion routine – leading more people to work from home a few days a week and dress more casually on the days they go to the office.
- Athleta, an activewear brand: comparable sales remained flat as shoppers shifted to buying more outfits for occasions and work. The company is living through a time when Americans eagerly stocked up on stretchy leggings, workout tops and other comfortable loungewear when spending time at home.
The retailer is also shaking up its store footprint, based on whether banners are growing or shrinking. So far this year, the company has closed a total of 29 Gap and Banana Republic stores in North America, O’Connell said during a call with investors. It now expects to close about 30 additional stores this year, reaching nearly 90% of its goal of 350 stores in North America by the end of fiscal year 2023.
She said the company is on track to open a total of 30 Athleta stores and now plans to open 10 Old Navy stores by the end of this fiscal year.
In August, Gap retracted its full-year forecast, citing company-specific issues, inflation and a tougher economy.
The company is looking for a new CEO after Sonia Syngal left this summer, playing a high-profile split with Ye’s Yeezy brand. Ye, formerly Kanye West, terminated his contract with Gap in September due to what he called breaches of contract and a lack of creative control. Gap removed all Yeezy products from stores in late October after West made public anti-Semitic remarks.
Gap said Thursday it had incurred $53 million in impairment charges related to Yeezy Gap.
The retailer has also faced a glut of clothes that are out of season, out of style or the wrong size, on top of high inflation and lower consumer confidence.
Inflated inventory has become a problem for many retailers, including Gap. A year ago, Gap struggled to keep up with demand as factories temporarily closed due to Covid and goods became stuck in overcrowded ports. The retailer even went so far as to pay extra to have clothes flown in by airfreight. However, due to delays and backlogs, some seasonal items arrived too late.
Inventory has piled up in recent quarters as consumers look for dressier clothes rather than casual wear. Gap inventories rose 34% in the first quarter and 37% in the second quarter. Gap was forced to offer deep price cuts, which reduced profits.
At the end of the third quarter, inventories were up 12% as the company continued to pack and store goods to sell another time. The company also saw more slow-running basics and some leftover seasonal products, O’Connell said.
She said the company is “committed to clearing our inventories so we don’t carry excess inventory into next year.”
Old Navy has faced a more specific inventory problem: The division decided to offer more women’s clothing in plus sizes, but the move ended up with stores with too many extended sizes and not enough popular sizes. Gap said Thursday that Old Navy made progress in the third quarter to improve its size balance, which has boosted sales.
Share of Gap is down 27% year to date. Shares closed at $12.72 on Thursday, up more than 5% during the session.
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