Gap’s flagship brand, Old Navy, experienced a significant turnaround during its holiday quarter, marking its first growth spurt in over a year. The retailer pleasantly surprised Wall Street with its earnings report on Thursday, exceeding expectations by a wide margin.
Old Navy’s sales soared by 6% to reach $2.29 billion, contributing to Gap’s overall gross margin surge of 5.3 percentage points to 38.9%. This boost was fueled by reduced markdowns and lower input costs, far surpassing analysts’ anticipated gross margin of 36%, according to StreetAccount.
Following the report, shares of Gap surged approximately 5% in after-hours trading. Here’s a breakdown of how the retailer fared in its fourth fiscal quarter compared to Wall Street’s projections, based on analysts surveyed by LSEG (formerly known as Refinitiv):
– Earnings per share: 49 cents vs. 23 cents expected
– Revenue: $4.3 billion vs. $4.22 billion expected
For the three months ending February 3, the company reported a net income of $185 million, or 49 cents per share, a significant improvement compared to the $273 million loss, or 75 cents per share, recorded a year earlier.
Total sales edged up slightly to $4.3 billion, a 1% increase from the previous year’s $4.24 billion. Like its counterparts in the industry, Gap benefited from a 53rd week during fiscal 2023; without it, sales would have seen a decline. This additional week contributed approximately four percentage points of growth during the fourth fiscal quarter, the company noted.
Comparable sales remained flat during the quarter, in contrast to the estimated 1.1% decrease predicted by StreetAccount. In-store sales showed a 4% increase, while online sales dipped 2%, accounting for 40% of total revenue.
Gap managed to reduce inventory by 16% during fiscal year 2023, bringing levels back in line. With inventory under control, the company is focusing on minimizing promotions and emphasizing full-price sales.
Throughout the quarter, Gap observed higher average selling prices across all its brands and anticipates growing its gross margin by at least half a percentage point in fiscal 2024.
CEO Richard Dickson reflected on the company’s journey, stating, “We were the authorities of taking on-trend basics, expressing it in ways that drove cultural conversations. At its best, we were a pop culture brand that did much more than sell clothes and as you know, we all know, we lost our edge. We devolved from a pop culture brand to a clothing retailer, and today we’re moving again,” in an interview with CNBC.
Preparing To Make A Comeback
Approaching the holiday season, Gap adopted a cautious stance in its outlook, citing an “uncertain consumer environment,” and reaffirmed those concerns on Thursday.
In the current quarter, the company anticipates sales to remain relatively flat, contrasting with estimates of a 0.2% decrease, according to LSEG. Likewise, for the full year, it expects sales to hold steady on a 52-week basis, diverging from estimates of a 0.5% increase, as reported by LSEG.
Reflecting on the challenges, CEO Richard Dickson remarked, “I think we have to look at 2023 where we did see a lot of volatility and uncertainty in the environment. We have inflation, student loan payments, high interest rates, we had dwindling consumer savings. Now, fortunately, despite many predictions to the contrary, we didn’t see a recession in the year but our industry was affected.”
“While the apparel market is currently expected to decline in 2024, there are always winners in every market, and we’re seeing the consumer react to newness,” he added. “We’re seeing innovative marketing drive traffic, and it’s inspiring us to believe that we are on the right track with our reinvigoration playbook.”
Since assuming the role of Gap’s chief executive just over six months ago, Dickson, formerly credited with revitalizing the Barbie brand at Mattel, has concentrated on restoring relevance to the retailer’s legacy brands and propelling them back into growth.
Last month, Gap revealed its appointment of fashion designer Zac Posen as its creative director and Old Navy’s chief creative officer. Acknowledging Old Navy’s significance to revenue, Gap recognizes that its success is pivotal. Despite consumer appetite for bargains and affordable options, Old Navy has witnessed declining sales for over a year.
Posen, renowned for his couture gown designs and expertise in women’s fashion, brings vital creative input to Dickson’s leadership team. He fills the design and apparel expertise gap, areas where Dickson’s background in toy companies lacks depth. Posen is poised to play a crucial role in rekindling cultural relevance across Gap, as noted by Dickson.
“His creative expertise, and his clarity on culture, you know, they’ve consistently evolved American fashion, making him a great fit for the company as we look to energize our culture of creativity and we look to reinvigorate these storied brands,” said Dickson. “His role as chief creative officer at Old Navy is really to harmonize, orchestrate and dial up the storytelling across product and marketing.”
Before Posen’s appointment, Dickson enlisted Eric Chan, former CFO of the LA Clippers, as Gap’s chief business and strategy officer. He also brought on board his former colleague Amy Thompson, Mattel’s former chief people officer, to serve in the same capacity at Gap.
Struggling with Banana and Athleta
Despite making strides in enhancing its gross margin and optimizing cost structures, Gap faces a significant challenge in tackling a sharp decline in sales across its four major brands: Gap itself, Old Navy, Athleta, and Banana Republic.
While Gap and Old Navy have shown promising signs of improvement, Athleta and Banana Republic continue to weigh down the overall performance of the company.
Addressing Banana Republic’s situation, CEO Richard Dickson expressed optimism about the brand’s aesthetic direction but acknowledged the need for patience in rebuilding momentum. “We gotta get really strong in fixing the fundamentals and strengthening these fundamentals in order to drive more consistent results,” Dickson emphasized. “And that’s what we’re really going to be focused on, our day-to-day execution, building upon the insights that we’re learning.”
Athleta, on the other hand, is still in the process of recovery following leadership transitions and challenges in product design, styles, and colors. Dickson noted shortcomings in both store presentation and marketing strategies.
In August, Athleta appointed former Alo Yoga President Chris Blakeslee as its new CEO, a move Dickson believes has brought positive changes to the brand. “We started the year with a much cleaner palette and we’ve seen early successes in these new arrivals at full price and we’re getting encouraged by the consumer’s reaction,” Dickson remarked.
“I really like where the team is going. We’ve got a new drop strategy, which they’ve been testing, there’s new innovation, and color has started to enter the stores and reacted really well.”
Let’s delve into each brand’s performance during the fourth quarter:
Old Navy: Sales surged by 6% to $2.29 billion, with comparable sales up 2%, surpassing estimates of a 1% increase, as reported by StreetAccount.
Gap: Sales experienced a 5% decline to $1.01 billion, primarily due to challenges in its China business. However, comparable sales showed resilience, rising by 4%, well above estimates of a 1.3% decrease, according to StreetAccount. The brand particularly excelled in the women’s category.
Banana Republic: Sales dipped by 2% to $567 million, with comparable sales declining by 4%, a better outcome than the 6.7% decline forecasted by analysts, according to StreetAccount. The company acknowledged progress in “elevating its aesthetic” but emphasized the need for time and concerted efforts to refine fundamental aspects of the brand.
Athleta: Sales declined by 4% to $419 million, accompanied by a substantial 10% decrease in comparable sales. While Gap noted an improvement in Athleta’s performance compared to the previous quarter, sales remain sluggish as the brand focuses on maintaining pricing integrity and surpassing a previous period of heightened markdowns.
