Gap shares soar on sales, earnings beat despite muted holiday forecast against uncertain backdrop

Hole a better-than-expected third quarter on Thursday, but the apparel retailer still appears cautious ahead of the holiday season as it works to reverse delays at Banana Republic and Athleta.

The company, which also runs Old Navy and its namesake banner, easily beat Wall Street earnings expectations and same-store sales, but only reaffirmed its full-year guidance and expects holiday sales to remain flat to slightly negative .

Shares rose more than 15% in extended trading. As of Thursday’s close, they were up about 21% year to date.

Here’s how Gap performed last quarter, compared to what Wall Street expected, based on a survey of analysts by LSEG, formerly known as Refinitiv:

• Profit per share: 59 cents, adjusted vs. 19 cents expected
• Gain: $3.77 billion versus $3.60 billion expected

The company’s reported net income for the three-month period ended Oct. 28 was $218 million, or 58 cents per share, compared with $282 million, or 77 cents per share, a year earlier. Excluding costs related to the restructuring, Gap reported earnings of 59 cents per share.

Revenue fell to $3.77 billion, down about 7% from $4.04 billion a year earlier.

Gap has been unable to reverse its ongoing sales decline, but same-store sales were much better than expected. They fell only 2%, compared to the 8.7% slowdown that analysts had expected, according to StreetAccount.

For the third quarter in a row, Gap also saw improvements in gross margin thanks to lower raw material costs, fewer promotions and a series of cost-saving initiatives that have been underway for several quarters. These measures included major layoffs resulting in the loss of more than 2,000 jobs.

During the quarter, Gap’s gross margin improved 3.9 percentage points to 41.3%, which was higher than the 38.9% analysts expected, according to StreetAccount. The company said it expects gross margins to continue to improve.

The longtime clothing giant is looking to improve sales and regain the relevance that once defined the company. It recently tapped former Mattel director Richard Dickson as CEO. Dickson, who revived the Barbie franchise during his time at the toy company, plans to use his branding talents to turn around Gap and position the company back into the mainstream of popular culture.

“Gap Inc. has weathered many disruptions in recent years, both external macro factors and execution errors and strategically well-intentioned initiatives have impacted the company. That said, the opportunity is clear,” Dickson said on an earnings call with analysts, his first as CEO of Gap. “I am confident we can breathe new life into our portfolio brands, while leading a creative culture that attracts, retains and develops the best talent in the industry. I am encouraged by the initial progress we have made to date, but we have a There is still a long way to go and there is still a lot of work to do.”

Gap saw modest improvements at Old Navy and its namesake banner. But Banana Republic and Athleta have hurt the retailer’s overall performance, which is part of the reason the retailer only reaffirmed its full-year guidance and gave a tepid forecast for the holiday quarter.

During the fourth quarter, Gap expects sales to be flat to slightly negative compared to last year, which LSEG said falls slightly short of the 0.3% increase that analysts expected.

“I think we still have work to do at Banana and Athleta, as evidenced by the performance in the quarter,” Chief Financial Officer Katrina O’Connell told CNBC in an interview. “So our fourth-quarter revenue outlook shows that difference in brand results as we think about continued strength at Old Navy and Gap, but perhaps a longer run at Banana and a little more work to reset Athleta.”

Dickson called Gap’s holiday outlook “balanced” and told analysts it is taking into account “the uncertain consumer environment.”

Here’s a closer look at each brand’s performance:

• Old Navy: The discount brand’s revenue was $2.13 billion, accounting for more than half of Gap’s total revenue during the quarter. Turnover fell by 1% compared to last year, while comparable turnover increased by 1%. The brand saw strength in women’s and children’s clothing, and a revival in activewear. Still, the company still has more work to do to improve its product lineup and develop a pricing strategy that “clearly communicates the amazing value” to win over cash-strapped families, Dickson said.

• Hole: Sales at Gap’s namesake company were $887 million, down 15% from last year. The brand is still reeling from the closure of Yeezy Gap and saw comparable sales decline 1%. It saw strength in women’s and baby clothes. Dickson noted that Gap has tremendous brand awareness but has been “way too quiet in the cultural conversation.” He said the company needs to “rekindle that dialogue, offering confident, on-trend ranges, well priced and expressed in big ideas and culturally relevant messages.”

• Banana Republic: Sales at Banana, known for its workwear and going-out wear, fell 11% from last year to $460 million. Comparable sales fell by 8%. The company says the brand is working to acquire new, valuable customers and reposition itself as a leading premium retailer after relying heavily on promotions in recent years. Dickson expects Banana could become a major player in the wildly popular “quiet luxury space.”

• Athlete: Gap’s sportswear brand was the worst performer during the quarter. Revenue was 18% lower than last year at $279 million, while comparable revenue fell as much as 19%. The company is still working to improve Athleta’s product range and reconnect with its core customer. Discussing the brand’s performance, Dickson called it downright “disappointing” and said a series of failures have taken it “off course.” However, recent changes in marketing strategies have shown promising results.