Gap tops third-quarter revenue, but tempers holiday season expectations

Gap tops third-quarter revenue, but tempers holiday season expectations

Holiday shoppers partake in early Black Friday shopping deals at the Gap store in New York’s Times Square.

Brendan McDermid | Reuters

Difference Thursday beat Wall Street’s quarterly earnings forecast but gave a cautious outlook for the holiday season.

The clothing retailer – which includes its eponymous brand, Old Navy, Banana Republic and Athleta – said it expects overall net sales could decline in single digits year-over-year in the fourth quarter of the fiscal year. 2022.

Chief Financial Officer Katrina O’Connell said in a press release as the company made progress in reducing its bloated inventory, it “will continue to take a cautious approach in light of the uncertain environment for consumers and increasingly promotional as we look to the remainder of fiscal 2022.”

Shares of the company rose about 8% in extended trading on Thursday. The stock has fallen 27% so far this year and closed Thursday at $12.72, up more than 5% during the session.

Here’s how the retailer fared in the three-month period ending October 29:

  • Earnings per share: 71 cents adjusted
  • Revenue: $4.04 billion vs $3.8 billion expected, according to consensus estimates from Refinitiv.

Wall Street had expected Gap to break even per share, but it was unclear whether reported earnings per share were on par with estimates.

Gap’s net income was $282 million, or 77 cents per share unadjusted, a dramatic improvement from a net loss of $152 million, or 40 cents per share, a year ago. Revenue increased 2% to $4.04 billion from $3.94 billion in the same quarter of 2021.

In August, Gap withdrew its full-year forecast, citing company-specific difficulties as well as high inflation and falling consumer sentiment.

The company is on the hunt for a new CEO following the departure of Sonia Syngal this summer and a high-profile rift with Ye’s Yeezy brand. Ye, formerly Kanye West, terminated his contract with Gap in September, citing what he called breaches of contract and a lack of creative control. Gap pulled all Yeezy products from its stores in late October after West made public anti-Semitic remarks.

Gap said Thursday it incurred $53 million in impairment charges related to Yeezy Gap.

Comparable sales

Total company comparable sales, which track revenue online and in stores open for at least 12 months, rose 1% from the year-ago period. Analysts had expected comparable sales to fall 3.2%, according to StreetAccount estimates.

Online sales increased 5% over last year and accounted for 39% of total net sales.

Here is an overview of each division:

  • The eponymous brand from Gap, known for its jeans and basics: comparable sales increased by 4% worldwide and remained stable in North America. The company said it was in better shape with its inventory, but had weaker sales in the children’s and baby categories.
  • Old Navy, known for its casual clothing for adults and children: comparable sales fell 1%. The brand has seen a drop in demand for baby and children’s clothing and has been hurt as low-income consumers feel pressured by inflation.
  • Banana Republic, known as a destination for suits and dresses: comparable sales increased by 10%. He is looking for a new direction after the pandemic disrupted the typical fashion routine – forcing more people to work from home a few days a week and dress more casually on days they go to the office.
  • Athleta, a sportswear brand: same-store sales were flat as shoppers shifted to buying more casual and workwear. The company lives in 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 in-store footprint, depending on which banners grow or shrink. So far this year, the company has closed a total of 29 Gap and Banana Republic stores in North America, O’Connell said in a call with investors. It now plans to close about 30 more stores this year, as part of a goal to close 350 stores in North America by the end of fiscal 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.

Inventory improvements

The retailer faces a glut of out-of-season, outdated or wrong-sized clothing.

Bloated inventory has become a problem for many retailers, including Gap. A year ago, Gap was struggling to keep up with demand as factories temporarily closed due to Covid and goods remained stuck in congested ports. The retailer went so far as to pay extra to ship clothes by air freight. But delays and backlogs meant that some seasonal goods were still arriving too late.

Inventories have piled up in recent quarters as consumers seek out dressier clothes instead of casual ones. Gap inventory rose 34% in the first quarter and 37% in the second quarter. Gap was forced to offer significant markdowns, cutting into profits.

By the end of the third quarter, inventory had risen 12% as the company continued to package and store goods for resale another time. The company also saw higher levels of slow-moving staples and some leftover seasonal produce, O’Connell said.

She said the company is “committed to cleaning up our inventory so that we don’t continue to carry over excess inventory into next year.”

Old Navy faced a more specific inventory problem: The division decided to offer more plus-size women’s clothing, but the move ended up leaving 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 boosted sales.

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