Gap Inc. on Tuesday reported that third quarter net sales rose 7% year over year to $4.1 billion, as comparable sales remained flat. E-commerce saw "solid double-digit growth" in the quarter, with increases at all brand segments, CFO Teri List-Stoll told analysts on Tuesday, according to a transcript from Seeking Alpha.
By segment globally in the quarter: comp sales at Old Navy rose 4% on top of last year’s 4% rise; Gap fell 7% after last year’s 1% rise; and Banana Republic rose 2% after last year’s 1% decline (its fourth consecutive quarter of positive comps, List-Stoll said), according to a company press release. Inventory was up 8% year over year, the company also said.
Third quarter gross profit rose 6% year over year to $1.62 billion, or, excluding the impact of the new revenue recognition standard, fell about 2% compared with last year, the company said. Gross margin was flat at 39.7%, or excluding the new standard declined 160 basis points to 38.1%, largely driven by shipping expenses and promotional activity at Gap. Operating margin was 8.9%, a 90 basis point decline from last year’s 9.8%, or, excluding the new standard declined 50 basis points to 9.3%.
Old Navy continues to float results at Gap Inc., as the flagship brand struggles with merchandise issues it can ill afford.
The company is pivoting to trimming costs at its Gap brand, and CEO Art Peck on Tuesday told analysts that will include shuttering hundreds of its 775 global Gap stores. The brand now sees 20% of sales and growing online and 30% in its more profitable outlet stores, while the remaining flagship specialty stores, with a wide range of productivity, are on balance dragging down profits, he said.
Wells Fargo analysts led by Senior Analyst Ike Boruchow in comments emailed to Retail Dive hailed those plans as "a positive step in the right direction," but also said that the "Gap brand still has some very heavy lifting to do around rectifying their product issues."
In fact, the brand’s plight simply doesn't rest with its stores per se, according to GlobalData Retail Managing Director Neil Saunders.
"Shutting stores is a response to the problem, rather than a solution to the problem," he told Retail Dive in an email. "The core issue with Gap isn’t that it has too many stores or that those stores are inherently unpleasant, it’s that they don’t have the right product in them. Gap’s issue has always been about product and, by extension, price. They have never really got to grips with producing a compelling range that is interesting to customers and is worthy of a higher price point."
It's the merchandise that is causing stores to suffer, Saunders also said. "The repetitive dullness of a range that changes little from year to year has certainly reduced customer visits to stores, and it, along with high discounting, has likely damaged the profitability of those stores. So now Gap is having to shrink its business."
Old Navy, by contrast, remains robust, aided by the strong economy and its expanded store fleet, Saunders said in a note emailed to Retail Dive. "[W]e remain impressed by the fashion edits and the ability of the brand to put out well-curated collections that attract the attention and spend of family shoppers," he said. "The strength of Old Navy's brand is evidenced by the fact that all categories and channels have benefited from growth. As well as driving more sales through existing stores, Old Navy has also benefited from an accelerated pace of opening which will see around 70 new shops added by the end of this fiscal year. "
Along with Old Navy, the company is succeeding with its smaller athleisure brands, Athleta, geared to women and girls, and men's brand Hill City, executives said. In the "third quarter, 95% of the Athleta business comped positively, demonstrating the underlying health of the business," Peck said, adding that early product feedback on and customer engagement with Hill City "has been strong."
GlobalData Retail research backs that up, according to Saunders. "Our data shows that this has been well received, although it is still very niche and needs improved visibility if it is to speed sales growth," he said, adding that Banana Republic's emerging recovery is notable.
"Overall, the business is in a reasonable state," he said. "However, the ongoing issues at the Gap brand are raining on what would otherwise be a sunny parade."