Excluding pandemic-driven surges, this increase in comparable sales marks the most significant growth for Gap since the fiscal 2017 holiday quarter, surpassing Wall Street’s forecast of 3.1%, according to StreetAccount.
In a conversation with CNBC, CEO Richard Dickson mentioned that the company hasn’t had to offer discounts frequently to move inventory, is attracting customers from various income levels, and has seen a “strong beginning” to the holiday shopping period.
“Despite external indicators suggesting macroeconomic pressures, especially on lower-income buyers, our customers are appreciating our price value, [and] our designs are standing out in the marketplace,” remarked Dickson. “Our products are connecting well. Thus, we’re optimistic as we approach the holiday season.”
Gap’s shares rose by 5% in after-hours trading on Thursday.
Here’s a breakdown of how the leading specialty apparel retail company in the U.S. performed this quarter compared to analysts’ predictions, as per a survey by LSEG:
- Earnings per share: 62 cents vs. 59 cents expected
- Revenue: $3.94 billion vs. $3.91 billion expected
The company’s net income for the quarter ending November 1 dropped nearly 14% to $236 million, or 62 cents per share, down from $274 million, or 72 cents per share, the previous year.
Sales increased to $3.94 billion, a 3% rise from $3.83 billion a year prior.
Looking ahead to Gap’s fiscal year, which is expected to conclude around early February, the company is now forecasting sales growth at the higher end of its earlier projections, anticipating an increase between 1.7% and 2%, aligning with analysts’ expectations. Previously, it had predicted a range of 1% to 2% growth.
The organization now projects its full-year operating margin to stand at around 7.2%, compared to its earlier forecast of 6.7% to 7%. This estimate accounts for the effect of tariffs, which are expected to have an impact of between 1 and 1.1 percentage points.
Comparable sales across Gap, which operates its flagship brand, Old Navy, Athleta, and Banana Republic, have remained positive for seven consecutive quarters. Under Dickson’s leadership, the company has concentrated on enhancing profitability and refining operations as much as reigniting its cultural relevance, resulting in sustained sales growth across its brands.
Gap’s profitability had been on the rise; however, with the advent of tariffs, both its gross margin and net income are experiencing challenges. During the quarter, Gap’s gross margin decreased by 0.3 percentage points to 42.4% but still exceeded expectations of 41.2%, according to StreetAccount.
The 14% drop in Gap’s net income was largely attributed to tariffs, finance chief Katrina O’Connell indicated during an interview.
Gap’s surprisingly strong results emerge against a backdrop where apparel sales generally remain subdued in the sector and consumers are prioritizing essential items over discretionary purchases like new apparel.
Outside of value-driven retailers such as Walmart and TJX Companies, earnings this season have largely been lackluster, with some businesses attributing this to macroeconomic factors and expressing concerns about the upcoming holiday period.
Dickson noted that Gap’s diverse brand portfolio provides a buffer during uncertain economic times by capturing consumers across various demographics.
“Our portfolio caters to an extensive range of customers, granting us tremendous adaptability in the current landscape,” stated Dickson.
Here’s a detailed look at how each of the company’s brands performed:
Gap
Gap’s core label has been central to Dickson’s revitalization plan since he assumed the position of CEO just over two years ago.
In the recent quarter, comparable sales surged by an impressive 7%—more than double the 3.2% increase anticipated by analysts, according to StreetAccount. Revenue climbed by 6% to $951 million.
During the quarter, Gap launched its popular “Milkshake” campaign, featuring the early 2000s Kelis song and members of the Katseye pop group. This initiative bolstered sales, but Dickson emphasized that Gap brand’s growth is a narrative of “consistency” and a blend of superior product, marketing, and collaborations.
Old Navy
Sales at Old Navy, Gap’s largest brand by revenue, increased by 5% to $2.3 billion, with comparable sales rising by 6%, significantly exceeding the 3.8% forecasted by analysts surveyed by StreetAccount. The company noted growth in essential categories such as denim, activewear, children’s apparel, and baby items.
Banana Republic
The upscale, workplace-friendly label is still undergoing a turnaround but experienced a 1% sales increase to $464 million during the quarter, with comparable sales up 4%, surpassing the 3.2% growth expected by analysts, according to StreetAccount.
This marks the second consecutive quarter that Banana Republic has reported positive comparable sales, credited to improved marketing and product offerings.
Athleta
Both revenue and comparable sales at Athleta fell sharply by 11% to $257 million, presenting a drawback within Gap’s generally favorable results.
Dickson has consistently mentioned that Athleta is in a year of recalibration, but the duration of this adjustment remains uncertain.
“We have been let down by the trend. We’re aware there’s extensive work required, but I truly believe in the brand,” said Dickson. “I trust in the leadership, and we’ll continue to develop this brand for the future it deserves.”
