Gap Inc. Climbing Out of Its Hole, Reports Q2 Top- and Bottom-line Gains
Gap Inc. showed further signs of turning itself around, on Thursday reporting a big leap in sales at Old Navy and a solid bottom-line for the second quarter ended Aug. 3.
Net income rose to $206 million, or diluted earnings per share of 54 cents, compared to $116 million, or 32 cents per share, in the year-ago period.
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Net sales of $3.7 billion were up 5 percent compared to last year; comparable sales were up 3 percent year-over-year. Due to the 53rd week in fiscal 2023, to maintain consistency, comparable sales for the second quarter of fiscal 2024 are compared to the 13 weeks ended Aug. 5, 2023.
Wall Street lifted Gap’s stock price 1.6 percent to $22.79 on Thursday.
The company reaffirmed its net sales and operating expense outlook for fiscal 2024, but increased its outlook for gross margin, which it sees expanding by about 200 basis points versus the prior forecast of at least a 150-basis-point increase. Gap released its second-quarter report a few hours earlier than expected on Thursday. The release was originally scheduled to be posted after the closing bell.
“We did have a successful quarter. Net sales were up 5 percent and that was on 5 percent less inventory. Our product is really resonating with our consumer,” Richard Dickson, Gap Inc.’s president and chief executive officer, told WWD. “We have a lot more work to do to unlock the full potential of our portfolio but I am very pleased with the progress.”
Old Navy is leading the turnaround charge. The brand’s second-quarter net sales of $2.1 billion were up 8 percent compared to last year. Comparable sales rose 5 percent. “This represents the fourth consecutive quarter of positive comparable sales at the brand as its continued focus on operational rigor is driving improved consistency in performance,” the company said in its statement Thursday.
Gap brand’s second-quarter net sales of $766 million were up 1 percent compared to last year. Comparable sales rose 3 percent, representing the third consecutive quarter of positive comparable sales at the brand, the company indicated. “Gap’s reinvigoration efforts have helped drive market share gains at the brand for the past five quarters,” the company stated.
At Banana Republic, second-quarter net sales of $479 million were flat compared to last year. Comparable sales were also flat. “The brand continues to focus on fixing the fundamentals and is actively working to improve its pricing and assortment architecture,” the company stated.
At Athleta, second-quarter net sales of $338 million were down 1 percent compared to last year. Comparable sales were down 4 percent. The company indicated that it expects Athleta to return to positive comparable sales growth for the remainder of the year.
“Old Navy, our largest brand, experienced its fourth consecutive quarter of positive comps and its sixth consecutive quarter of market share gains,” Dickson said during the interview. “There’s been real strength in women’s, particularly active. It’s an exciting category we’re strategically focused on growing. We also saw growth and strength in denim, kids and baby and dresses.
“[At Gap,] we’re very excited about the progress,” Dickson said. He said the brand is building off strong reactions to the recent spring “Linen Moves” campaign, the current fall “Get Loose” denim-focused campaign capitalizing on baggy and oversize trends, and collaborations with the brands Dôen and Mad Happy. “In general, we are making a lot of progress revitalizing this iconic brand,” Dickson said.
He said that at Banana Republic, “Men’s is in a stronger position than women’s. We have work to do in women’s. In general, Banana has been working on fixing fundamentals — merchandising strategies, fit and depth of product in stores. We are making progress on Banana. Our new store in SoHo is a great reflection of the new direction.” The company has been interviewing candidates for the CEO position at Banana that has been vacant since May this year.
Dickson said that Athleta has “lots of growth potential” and lapped “a very heavy period of discounting last year.” But he also said the brand is broadening its customer base, selling better at full price, and is expected to deliver positive comps for the remainder of this year. “The marketing is gaining traction and our fashion product is resonating,” Dickson said.
The recent performance of Gap Inc. is fueling optimism about the second half of 2024. “We are excited about the back half and continue to execute against our strategic priorities,” Dickson said. “We’ve demonstrated our ability to perform while we are transforming.”
Asked about how back-to-school business has been so far, Dickson replied, “It’s proceeding quite nicely for us. It’s one of the first seasons in a long time where we’ve been running some very exciting marketing campaigns at Gap and Old Navy,” noting that there’s an opportunity to accelerate market share in the kids and baby categories.
Asked how he reads the current consumer attitude toward discretionary spending, Dickson said, “There’s been no significant change in consumer behavior. We have been very encouraged to see growth across all income cohorts. It reflects the strong value proposition of our brands.”
In other results reported Thursday, store sales increased 4 percent compared to last year. The company ended the quarter with 3,568 store locations in about 40 countries, of which 2,541 were company operated.
Online sales increased 7 percent compared to last year and represented 33 percent of total net sales.
Gross margin of 42.6 percent increased 500 basis points versus last year’s gross margin.
“This quarter’s challenge for Gap was to show momentum in the growth it has delivered over the past two quarters. In our view, it has achieved this with a 4.8 percent uplift in total sales and a 3 percent gain in comparable terms,” Neil Saunders, managing director of GlobalData, commented Thursday. “Admittedly, this has been delivered against the backdrop of a weak prior year and it does not entirely offset all the past declines, but it is a very firm step in the right direction which lends weight to Richard Dickson’s argument that the business is on the road to recovery.
“We are particularly pleased with the performance in the U.S., where overall sales grew by a very solid 7 percent over the prior year,” Saunders said, adding, “The current performance is also market beating which underlines the fact Gap is taking back share in apparel.…While the overall sales figure is solid, underlying performance is more mixed. Old Navy led the pack with 9.9 percent sales growth in the U.S., supported by a 5 percent uplift in global comparables.”
Saunders said that “after a period of dire performance, the quality of the range has improved with many more fashion-led pieces mixed with the essential staples consumers come to Old Navy for. Store environments are also sharper with less clutter and more compelling signage around pricing and deals. These might be simple changes, but they have clearly been effective in helping to drive sales in a constrained environment that is still very focused on value,” Saunders said.
Saunders added the performance at Gap brand compared to Old Navy was “more muted” and Banana Republic’s performance wasn’t great but better than the recent past when declines were steeper.
Earlier in the day, Dickson issued a statement about the quarter, which read, “Gap Inc. delivered another successful quarter, exceeding financial expectations and gaining market share for the sixth consecutive quarter. In comparison to where we were only one year ago, we are in a stronger position across key metrics that matter — including net sales, margins and our cash position — and we are making consistent progress in the reinvigoration of our brands. These results are a reflection of the dedication and collaboration of our global team, reinforcing my confidence that we are well on our way to unlocking the full potential of this extraordinary portfolio of iconic American brands.”
On Aug. 22, 1969, the original Gap store opened on Ocean Avenue in San Francisco in 1969. This year on Aug. 22, Gap team members marked the occasion by ringing the NYSE opening bell. At that time, Gap changed its ticker symbol to GAP from GPS. The company’s common shares trade on the New York Stock Exchange.
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