Gap (GPS) Q3 2022 Earnings

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

Brendan McDermid | Reuters

Gap Quarterly earnings beat Wall Street expectations on Thursday but gave a cautious outlook for the holiday season.

The apparel retailer — which includes its namesake brand, Old Navy, Banana Republic and Athleta — said it expects its overall net sales to decline in the mid-single digits year-over-year in the fourth quarter of fiscal 2022.

Chief Financial Officer Katrina O’Connell said in a press release that while the company is making progress in reducing its bloated inventory, it will “continue to take a cautious approach in light of an uncertain consumer and increasingly promotional environment as we review the remainder of fiscal 2022.”

Shares of the company rose nearly 8% in extended trading on Thursday. Shares have fallen 27% so far this year and closed up more than 5% during Thursday’s session at $12.72.

Here’s how the retailer performed for the three-month period ending Oct. 29:

  • Earnings per share: 71 cents corrected
  • Income: Refinitiv consensus estimates of $4.04 billion versus $3.8 billion expected.

Wall Street had expected Gap to break even on a per-share basis, but it was unclear whether the reported earnings per share would compare to estimates.

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

In August, Gap withdrew its full-year guidance, citing company-specific struggles along with high inflation and low consumer sentiment.

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

Gap said Thursday it took a $53 million impairment charge related to Yeezy Gap.

Comparable sales

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

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

Let’s take a closer look at each section:

  • Gap’s namesake brand known for its denim and basics: comparable sales increased 4% globally and were flat in North America. The company said it was in a better position with inventory, but had weaker sales in the baby and toddler categories.
  • Old Navy, known for its casual clothing for adults and children: comparable sales were down 1%. The brand has seen softer demand for baby and children’s clothing and suffered from lower-income consumers suffering from inflation.
  • Known as a place for suits and dresses, Banana Republic: comparable sales increased 10%. After the pandemic disrupted the typical fashion mode, it is looking for a new direction – causing more people to work from home a few days a week and dress more casually on the days they go to the office.
  • Athleta, an activewear brand: Comparable sales were flat as shoppers shifted to buying more clothes for occasions and work. The business is entering an era when Americans eagerly stock up on stretchy leggings, workout shirts and other comfortable loungewear while spending time at home.

The retailer also shakes up store footprints based on growing or shrinking banners. 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 expects to close about 30 additional stores this year as part of its goal of closing 350 stores in North America by the end of fiscal 2023.

He 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 struggles with an abundance of clothes that are out of season, out of style or the wrong size.

Shell inventory has become a problem for many retailers, including Gap. A year ago, Gap struggled to meet demand as factories were temporarily closed due to Covid and goods were stuck in congested ports. The retailer went so far as to pay extra to fly the clothing by air freight. But delays and delays meant some seasonal goods still arrived too late.

Inventory has built up in recent quarters as consumers look for more fashionable clothes instead of casual wear. Gap’s stock rose 34% in the first quarter and 37% in the second quarter. Gap was forced to offer deep discounts, cutting profits.

Inventories rose 12% at the end of the third quarter as the company continued to package and store goods to sell at another time. O’Connell said the company saw higher levels of slow-turning fundamentals and some remaining seasonal products.

He said the company is “committed to clearing our inventory so that we do not continue to carry excess stock next year.”

Old Navy faced a more specific inventory problem: The division decided to offer more sizes of women’s clothing, but the move left stores with too many sizes and not enough popular sizes. Gap said Thursday that Old Navy made progress to improve its balance of sizes, which boosted sales in the third quarter.

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