Gap Inc. on Thursday said second quarter net sales rose 8% to $4.1 billion, or 4% excluding presentation changes from a new revenue recognition standard. Net income in the quarter rose to $297 million from $271 million in the year-ago quarter, according to a company press release.
In the quarter, the company posted its seventh consecutive quarter of positive comparable sales as total comps rose 2%. By brand globally, comparable sales rose 5% at Old Navy, fell 5% at Gap and rose 2% at Banana Republic. The company continues to expect comps for fiscal year 2018 to be flat to slightly positive.
Gross margin expanded 90 basis points year over year to 39.8%, or, excluding the impact of presentation changes from a new revenue recognition standard, contracted by 10 basis points to 38.8%, largely due to the Gap brand, the company also said. Operating margin shrunk 220 basis points to 9.7%, after a contraction to 11.9% last year.
Despite a strong quarter buoyed by a robust economy, Gap Inc. is struggling versus its peers, with sales slowing unevenly across brands.
Executives on Thursday noted the strength of its activewear offering at both Old Navy and Athleta, despite some softness in the athleisure brand's swim sales in the quarter. They also acknowledged the company's major weakness: ongoing troubles at Gap, where new brand chief Neil Fiske is tasked with a turnaround.
"A rising economic tide does float all retail boats, but it cannot float those with holes in them and, in our view, Gap is still a very leaky vessel," Neil Saunders, Managing Director of GlobalData Retail, said in comments emailed to Retail Dive. "The main problem is still the range. As much as Gap claims that this has improved, there is scant evidence on the ground. The assortment continues to look samey and boring, with little effort being made to create newness or points of interest."
CEO Art Peck deemed Gap's 5% comp decline "unacceptable," but also defended the brand's progress in light of "a conscious choice" to work through poorly selling inventory, which he said will continue to leave it with merchandise imbalances into the fall. "[W]e will see continued improvement at Gap brand as we move through the year," he told analysts on Thursday, according to a transcript from Seeking Alpha. "Quarter-by-quarter, we expect performance to improve, and we believe the worst is behind us."
Gap's problems have to do with what Peck called "functional qualities" like quality or fit and not shoppers' connection to it, based on research by an unnamed outside firm, with some 13,000 consumers. "And we found that the emotional equities are actually quite strong," he said. "That actually was encouraging to me because I believe that functional equities are easier to address than the emotional equities of the brand."
But Gap is running out of time, Saunders warned, adding that GlobalData's own research shows, in contrast to Peck's assertions, that satisfaction with the brand continues to decline.
"Management needs to press Gap's reset button," he said. "The brand is adrift and needs a much clearer identity and sense of purpose. This is now an urgent requirement as a lot of other apparel brands — like J Crew, American Eagle, and Abercrombie & Fitch — are all upping their game and producing more consumer-centric collections. While the market is moving forward, Gap is, at best, standing still."