Gap Inc. on Thursday saw shares rise nearly 9% as the apparel company beat analyst expectations for its third quarter earnings and sales, according to a company press release. Diluted earnings in the period were 58 cents per share, beating the Zacks consensus estimate of 55 cents per share.
Net income rose 12.3% to $229 million and net sales rose 1.1% to $3.84 billion for the third quarter, the company said, up from $3.80 billion a year ago and beating the Zacks consensus estimate of $3.77 billion. The company is in the midst of intense negotiations with landlords as it tackles plans for some 200 store closures this year and next, executives told analysts on Thursday, according to a transcript from Seeking Alpha.
The company turned in its fourth straight quarter of same-store sales increases — this quarter, a 3% rise, up from last year's 1% decrease, according to the release. By brand, Old Navy global same-store sales rose 4%, even with the year-ago period (and excluding negative impact of about 1 percentage point from last year's Fishkill distribution center fire); Gap Global same-store sales rose 1%, up from a 4% decline last year, (excluding negative impact from the Fishkill fire of about 4 percentage points); and Banana Republic Global same-store sales fell 1% percent, up from last year's 6% decline, (excluding an estimated negative impact from the fire of some 2 percentage points).
Gap's improvements in the third quarter, as is usually the case, were underpinned by its Old Navy brand, though all of its banners — even struggling Banana Republic — improved over the year-ago period. The new story is also its momentum: four consecutive quarters of same-store sales improvements seem to suggest the company is finally gaining traction in its turnaround.
CEO Art Peck pinned the company's improving fortunes on investments in performance fabrics and other quality improvements. "Where we are putting innovation into the product, we're also seeing that the customer is very much willing to pay for it," he told analysts, according to Seeking Alpha's transcript. "And Athleta is an excellent example of that being a very high-rate price business with everything in its assortment, whether it's lifestyle or performance, having elements of innovation. But we are seeing that pay off, frankly, across all of our businesses."
The dependence on Old Navy is an old story — the company itself acknowledged the importance of its lower-priced brand earlier this year. But some analysts see it another way: that the Gap, and especially Banana Republic, continue to be a drag.
Things aren't bad across the board. In merchandising and on Instagram, (where the company's brands are shoppable) both Gap and Old Navy are making strides, according to a note from Jane Hali & Associates emailed to Retail Dive. Gap, which has been working with various celebrities in their ad campaigns this year and joining in on positive trending conversations, boasted 1.7 million Instagram followers in June and now has 1.9 million. Old Navy, for its part, has teamed up with micro-influencers and has been posting engaging content. According to Jane Hali, the brand had a million followers in June and now has 1.3 million. Athleta has 352,000 and Banana Republic has 977,000.
"Old Navy continues to be their strength while Gap is better than we have seen it in a long time," Jane Hali analysts said of the brands' product, noting that Old Navy is "on trend" and is strong in the kids department. "Gap's denim presence is resonating with consumers, the assortment is innovative and on trend. [We] noted the newness in September and the monthly floor-sets have kept the momentum."
Peck himself said that Old Navy's merchandising is resonating, that its supply chain is now speedy, which is helping sales by making it easier to respond to trends, and, regarding its athleisure brand, "simply put, Athleta is on fire. Top and bottom line momentum continues. We're seeing exceptional growth outpacing the industry with operating margin expansion."
Athleta, indeed, is offering technical fabrics and silhouettes that "truly take you from the office to evening to exercise," and that versatility is where the growth in that segment lies, according to Jane Hali. Notably, that growth does not lie with Banana Republic. "Banana has not improved their product mix," Jane Hali warned. "The inventory seems heavy and the promotional cadence runs from 40-50% off. There is growth for Athleta, but Banana Republic continues to disappoint."
Unfortunately for Gap Inc., although Athleta, along with the company's tiny Intermix brand, are both well positioned and loaded with potential, both banners are too small to significantly boost revenues, GlobalData Retail Managing Director Neil Saunders noted.
Saunders was also less impressed with improvements at the Gap. "There have been marginal improvements in quality and greater emphasis has been placed on in-demand products like athletic wear," he said. "However, the majority of the offer remains samey, as do things like store environments and point of sale material. … The change at Gap is lackluster — especially when compared to a brand like Abercrombie & Fitch, which has ripped up the rulebook and completely reinvented itself. Gap needs to emulate this bravery and do something radical to put the business back on a sustainable growth trajectory."
That extends to Banana Republic. Gap Inc. executives have been up front about their long game for Banana Republic — they aim to stabilize it before they try to grow it — but Saunders sees that as "a tacit admission of not knowing what changes to make or how to make them."
With progress at Gap so slow and barely moving at Banana Republic, Old Navy's strengths will continue to be very much needed. Indeed, Old Navy will likely help boost the company, once again, at the holidays; the brand's winter and fall collections are compelling, Saunders said. "Gap has become a more stable business and sales declines are starting to bottom out," he said. "However, we maintain our view that the company has no real sense of direction or ambition for two of its major brands."