The Gap logo is displayed at the Gap Store on April 25, 2023 in Los Angeles, California.
Mario Tama | Getty Images
gap The company reported another quarter of net losses and declining sales across its four brands, but the retailer insisted it was making progress — and managed to improve margins significantly, sending shares higher in extended trading.
Here’s how the clothing retailer fared in the fiscal first quarter compared to what Wall Street was expecting, based on a survey of analysts by Refinitiv:
- Earnings per share: 1 cent, rate, for an expected loss of 16 cents
- he won: $3.28 billion vs. $3.29 billion expected
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For the three-month period ended April 29, the company’s net loss narrowed to $18 million, or 5 cents per share, from $162 million, or 44 cents per share, in the same period a year earlier. On an adjusted basis, the company reported earnings of $3 million, or 1 percent per share.
Sales fell to $3.28 billion, down 6% from $3.48 billion a year earlier.
Shares jumped more than 15% in after-hours trading as a result of the improvement in gross profit margins.
Gap, whose namesake brands include Old Navy, Banana Republic and Athleta, has been without a CEO for nearly a year as it works to restructure the business, better understand its customers, and return to profitability.
The retailer said work is in full swing — and admitted it’s been in demand for a long time.
“Consistent with what you’ve heard from us over the past few quarters, we continue to take the actions necessary to drive critical change at Gap Inc., to further improve the trajectory of our business and get us back on a path of delivering consistent results,” interim CEO Bobby Martin told investors on an earnings call.
“I understand we’ve brought these issues to the surface before, and what I would say is simply that this business has been derailed for far too long and it is imperative that we pursue it seriously,” he said.
Last month, Gap told investors it would lay off about 1,800 employees, more than triple the 500 it announced in September, as part of a broad effort to cut costs and streamline operations.
Between this year and last, the company reduced 25% of its roles at headquarters, increasing the number of direct reports each manager had from two to four, and cutting management layers from 12 to eight, the company said.
The company said the cuts remove layers of red tape and bureaucracy that will allow Gap to be smarter in its decision-making and focus on its creative efforts.
In March, she also announced a major leadership change. Athleta CEO Mary Beth Laughton has left the company and its chief growth officer role has been eliminated. And Gap announced that Chief Personnel Officer Sheila Peters will also be leaving, albeit at the end of the year.
During an earnings call with investors, Martin said the search for a new CEO is ongoing, but he didn’t share a timeline for when the job will be filled.
“When I took over as interim CEO in July, I didn’t expect to still talk to you on our first quarter earnings call,” Martin said. “But this just underscores how strongly the Board of Directors is committed to appointing the right person as its next CEO, someone with passion, strong vision and obsession with customers who will drive this company forward.”
Martin previously said that the next CEO will be an outside candidate.
Last quarter, comparable sales were down 3% and store sales were down 4% year-over-year.
Online sales, which account for 37% of total net sales, were also down 9% year over year, but the company said that was due to the fact that sales trends were becoming more in line with pre-pandemic metrics. The company added that digital sales increased by 39% compared to the first quarter of 2019.
Leading up to last year, many retailers were still grappling with supply chain issues related to the pandemic, which left Gap with excess inventory that the company had difficulty selling because it was out of season or out of date.
Gap, like other retailers, relied on promotions to clear that inventory, particularly at Old Navy, but in its most recent quarter, it was able to maintain discounts — and benefit from lower air freight costs that have improved margins for retailers across the industry. .
Gross margins were up 5.6 percentage points year-over-year to 37.1%, and improved from the prior quarter as well, when margins were 33.6%.
The company attributed the rise in margins to lower air freight charges and a slowdown in discounting, which was partially offset by continued inflationary costs.
How Gap Brands Succeeded
- Old Navy, which accounts for the majority of Gap’s revenue, net sales fell 1% to $1.8 billion, and comparable sales fell 1%. Sales were strong in the women’s and children’s categories, but gains were offset by softness in activity and children and a continued slowdown in consumer demand. Old Navy, which caters to lower-income consumers, is more exposed to macroeconomic conditions.
- gap It reported $692 million in sales, a 13% decline year-over-year, and a 1% increase in comparable sales. Similar to Old Navy, its name banner has also seen strength in the women’s and children’s categories, and softness in sportswear and children’s. The company said sales were also affected by the closure of Gap stores.
- Banana Republic It reached $432 million in sales, down 10% year-over-year. The company attributed the decline to a “huge” 24% jump in sales in the year-ago period driven by a shift in consumer preferences as many returned to work and out after the Covid lockdown. Comparable sales decreased by 8%.
- Athlete It still misses the mark when it comes to what consumers are looking for. Net sales fell to $321 million, down 11% year-over-year, and comparable sales were down 13%. The decline in sales was attributed to ongoing product acceptance challenges, including “mistakes” in color, print, pattern, silhouette, and a departure from the brand’s “performance genetics”.
Gap also continues to improve its inventory levels, which were down 27% in the first quarter at $2.3 billion compared to a year ago.
Gap’s chief financial officer, Katrina O’Connell, said the company still has promotions and discounts, but it’s not reducing margins the way they were now that the inventory has been cleaned up.
“The reduction in inventory has allowed us to clean up the reduction part of the business, which doesn’t add a lot of customer value, right? That’s just inventory that the consumer didn’t respond well to last year and we had a sale through excess inventory,” O’Connell said on an earnings call. wrong stock”.
“The margin benefits come from getting rid of that discount, what it allows us to do is still merchandising, which is a better way to deliver value to the consumer, which is still important at this time.”
Across its brands, Gap has conducted research to better understand its customers so it can offer the products they want, regain market share and reverse stagnant sales.
Gap’s full-year outlook is largely unchanged from the forecast it provided in March. The company expects second quarter net sales to fall in the mid-to-high single-digit range.
For the full year, you still expect net sales to fall in the low to mid single digit range.
The outlook is affected in part by the sale of the company to Gap China. In the second quarter of fiscal 2022, it included $60 million in net sales from GapChina, and in fiscal 2022, it included $300 million in sales.
Fiscal year 2023 will also include its 53rd week, which is expected to boost sales by $150 million.
Gap expects gross margin to continue to rise and capital expenditure to fall to $500 million to $525 million, compared to the previous range of $500 million to $550 million. This decline was driven by a decision to open about five fewer Old Navy and Athleta stores during the fiscal year.
The company plans to open a network of 25 to 30 Old Navy and Athleta stores in the fiscal year, one-third of which will be Old Navy. It expects to close 50 to 55 outposts in Gap and the Banana Republic, more than half of which will be Gap.
Read the full earnings release.