Gap tops Street with ‘solid’ quarter; holiday outlook soft
Gap Inc. reported a better-than-expected third quarter with earnings and comp-sales that blew past Wall Street expectations, helped by the improved performance of its biggest brand, Old Navy.
The retailer was still plagued by slumping revenue, dragged down by ongoing slowdowns of Banana Republic and, more recently, Athleta, whose comp sales fell 19% during the quarter.
On the earnings call, Richard Dickson, who joined the company as president and CEO in August, noted that Gap has experienced a lot of disruption during the last several years, including external macro factors as well as execution missteps.
“All that said, the opportunity is clear,” Dickson told analysts on the call. “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.”
Gap reported net income of $218 million, or $0.58 a share, for the quarter ended Oct. 28, compared with $282 million, or $0.77 a share, in the year-ago quarter. Adjusted earnings came to $0.59 a share, far ahead of the $0.20 a share analysts had expected.
Revenue fell 7% to $3.77 billion, weighed by the negative impact of the sale of Gap China, topping estimates of $3.61 billion. Comparable sales fell 2%, far better than the 8.7% drop analysts had expected. Online sales decreased 8% and represented 38% of total net sales. Store sales decreased 6%.
Here is a breakdown of Gap sales by division:
•Old Navy: Net sales slipped 1% to $2.13 billion. Comp sales rose 1%. The brand saw strength in women’s and kids and baby during the quarter, as well as an acceleration in the active category
•Gap: Net sales fell 15% to $887 million, down 15% compared to last year. Excluding the estimated negative impact from the sale of Gap China and the shutdown of Yeezy Gap, net sales were down about 6% versus last year. The brand saw strength in women’s and baby during the quarter. Comparable sales were down 1%.
•Banana Republic: Net sales fell 11% to $460 million. Comp sales were down 8%. “Banana Republic continues to work toward re-positioning itself as a premium lifestyle brand and acquiring new, high-value customers,” Gap stated.
•Athleta: Net sales fell 18% to $279 million, down 18% compared to last year. Comp sales were down 19%. Gap said that Athleta’s sales in the quarter continued to be challenged as the brand laps last year’s elevated discount levels and the team works to re-engage its core customer through better product and brand right marketing.
The company’s gross margin improved by 3.9 percentage points to 41.3% during the quarter, which was more than analysts had expected.
“Gap Inc. delivered a solid performance in the third quarter, stated Dickson in the earnings release. “We were pleased to see market share gains as well as improvements in both gross margins and operating margins, demonstrating our ability to drive operating and financial discipline.”
The company reaffirmed its full-year guidance and, similar to Walmart and Target, offered a cautious forecast for the fourth quarter, with sales expected to be flat to slightly negative compared to last year.
“Our third quarter results reflect ongoing progress, with gross margin expansion and operating margin improvement, resulting in strong free cash flow generation,” said CFO Katrina O’Connell. “As we look to the remainder of the year, we are reaffirming our full-year revenue outlook, which balances the progress we are seeing with a prudent view of the economic and consumer environment in which we are operating.”
The company ended the quarter with 3,533 store locations in over 40 countries, of which 2,598 were company operated.