A general view of an Old Navy store.
Gap Inc.
Holes largest banner Old Navy returned to growth for the first time in more than a year during the holiday quarter, as the retailer posted profits Thursday that were well above Wall Street expectations.
Sales at Old Navy grew 6% to $2.29 billion, and Gap's overall gross margin rose 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 rose about 5% in extended trading after the report.
Here's how the retailer did in its fiscal fourth quarter, compared to what Wall Street expected, based on a survey of analysts by LSEG, formerly known as Refinitiv:
- Earnings per share: 49 cents versus 23 cents expected
- Sales: $4.3 billion versus $4.22 billion expected
The company's reported net income for the three-month period ended Feb. 3 was $185 million, or 49 cents per share, compared with a loss of $273 million, or 75 cents per share, a year earlier.
Revenue 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 in fiscal 2023 and without this week, sales would have fallen during the quarter. The additional week added about four percentage points to growth during the fiscal fourth quarter, according to the company.
Comparable sales during the quarter were flat, compared with estimates of a decline of 1.1%, StreetAccount said. Sales in stores increased by 4%, while online sales decreased by 2% and represented 40% of total sales.
The retailer has reduced inventory by 16% in fiscal 2023, and now that these levels are under control, Gap is working to keep promotions in check and boost full-price sales.
During the quarter, Gap saw higher average selling prices across its brands, and expects gross margin to grow by at least half a percentage point in fiscal 2024.
“We were the authorities on taking trendy basics and expressing them in a way that sparked cultural conversations. At our best, we were a pop culture brand that did much more than just sell clothes and as you know, we all know, we lost our We went from a pop culture brand to an apparel retailer, and today we're moving again,” CEO Richard Dickson told CNBC in an interview.
“We're getting our atmosphere back.”
Initiate a turnaround
Heading into the holidays, Gap struck a cautious tone with its outlook, warning of an “uncertain consumer environment,” and on Thursday it reiterated those concerns.
In the current quarter, the company expects sales to remain about flat, compared to estimates of a 0.2% decline, LSEG said. For the full year, the company also expects sales to remain roughly flat, on a 52-week basis, compared to estimates of an increase of 0.5%, according to LSEG.
“I think we have to look to 2023, where we saw a lot of volatility and uncertainty in the environment. We have inflation, student loan payments, high interest rates and declining consumer savings. Now thankfully, despite many predictions to the contrary, we have no recession, but our sector was certainly affected,” said Dickson.
“Although the apparel market is currently expected to shrink by 2024, there are always winners in every market, and we see consumers responding to novelty,” he said. “We see innovative marketing driving traffic, and it inspires us to believe we are on the right track with our revitalized playbook.”
It's been a little over six months since Dickson, the first Mattel Credited with reviving the Barbie brand, the boss took over as CEO of Gap and during that time focused on bringing relevance back to the retailer's legacy brands and growing them again.
Last month, Gap announced it had appointed fashion designer Zac Posen as creative director and chief creative officer of Old Navy. Given its size and contribution to revenue, Gap can't succeed if Old Navy doesn't win, and for more than a year sales have been declining, even at a time when consumers are hungry for bargains and affordable options.
Posen, who started out designing couture dresses and specializes in women's dresses, is a key member of Dickson's executive team. He helps fill in the gaps when it comes to design and clothing, areas where Dickson lacks expertise, having spent most of his career at a toy company. He will also play a key role in reigniting cultural relevance at Gap, Dickson said.
“His creative expertise and clarity on culture have consistently evolved American fashion, making him an excellent fit for the company as we look to advance our culture of creativity and reinvigorate these legendary brands,” the spokesperson said. Dickson. “His role as Chief Creative Officer at Old Navy is essentially to harmonize, orchestrate and amplify product and marketing storytelling.”
Prior to Posen's appointment, Dickson hired Eric Chan, the former CFO of the LA Clippers, as Gap's chief business and strategy officer. He also hired his former colleague Amy Thompson, Mattel's former Chief People Officer, to take on the same role at Gap.
Banana and Atleta lag behind
On the back end, Gap has made improvements to gross margin growth and streamlined its cost structure, but is dealing with a sharp decline in sales across its four brands: its namesake banner, Old Navy, Athleta and Banana Republic.
Gap and Old Navy have seen some signs of progress, but Athleta and Banana Republic have left the overall business behind.
When it comes to Banana, Dickson told CNBC that he is “encouraged by the aesthetic direction of the brand” but said it will take time to regain momentum.
“We need to get really strong at establishing the foundations and strengthening those foundations to get more consistent results,” Dickson said. “And that's what we'll really focus on, our day-to-day execution, building on the insights that we learn.”
Athleta is still in a state of recovery after numerous leadership changes and a number of missteps in designing the right type of product in the right styles and colors. It has also missed the mark in its stores and marketing, Dickson said.
In August, Athleta named former Alo Yoga president Chris Blakeslee as its next CEO, and Dickson said the brand has made progress since he came on board.
“We have started the year with a much cleaner palette and have seen early success with these full-price newcomers and are encouraged by the consumer response,” said Dickson. “I really like where the team is going. We have a new drop strategy that they've been testing, there's new innovation, color is starting to make its way into stores and is responding really well.”
Here's a closer look at each brand's fourth-quarter performance:
- Old Navy: Sales rose 6% to $2.29 billion, while comparable sales rose 2%, higher than estimates of a 1% increase, StreetAccount said.
- Hole: Sales fell 5% to $1.01 billion, pressured by the sale of the brand's Chinese operations, while comparable sales rose 4%, well above estimates of a 1.3% decline, according to StreetAccount. The brand saw strength in the women's category.
- Banana Republic: Revenue fell 2% to $567 million, down 2%, while comparable sales fell 4%, better than the 6.7% decline analysts expected, according to StreetAccount. The company noted that Banana has made progress in “elevating the aesthetic,” but that the brand's recovery “will take time and there is work to be done to better execute many of the core principles.”
- Athlete: Sales fell 4% to $419 million, while comparable sales fell as much as 10%. Gap noted that Athleta's performance improved compared to the previous quarter, but said sales are sluggish as the brand looks to hold the line on pricing and break a previous period of high markdowns.
Correction: This story has been updated to correct the spelling of fashion designer Zac Posen's name.