Dive Brief:
- Gap Inc. reported that Q4 net sales rose 2% year over year to $4.2 billion, with store sales flat and e-commerce up 5%. Comps rose 3%.
- Gross margin shrank by 80 basis points from a year ago. Tariffs siphoned 200 basis points from merchandise margins, which shrank by 90 basis points. Net income fell nearly 17% to $171 million.
- By brand in Q4: Old Navy net sales rose 3% to $2.3 billion, with comps up 3%; Gap rose 8% to $1.1 billion, with comps up 7%; Banana Republic net sales rose 1% to $549 million, with comps up 4%; and Athleta net sales fell 11% to $354 million, with comps down 10%.
Dive Insight:
Gap’s top three brands — Old Navy, namesake Gap and Banana Republic — are enjoying some momentum, but its activewear Athleta brand continues to lag. The holiday quarter was challenged further by what executives said were “expansive store closures due to extreme weather at the end of January.”
This helped make Gap Inc. an outlier, according to Wells Fargo analysts led by Ike Boruchow.
Gap Inc. “is a rare retailer to post somewhat lackluster results for 4Q,” with no upside to comps, gross margin or earnings, Boruchow said in a Thursday client note. “It does seem that the slowdown was seen exiting the Q — with trends picking back up [quarter to date]. ...The good news is Gap, [Old Navy and Banana Republic] are all comping [point of sale] and this seems sustainable.”
Tariffs took a bite out of margins and profits in the quarter and through the full year, and present ongoing uncertainty this year as well, Chief Financial Officer Katrina O'Connell told analysts Thursday.
“Tariff impacts were significant,” she said. “However, our mitigation strategies have effectively managed these pressures.”
The retailer’s move into beauty has been successful so far, CEO Richard Dickson said. A beauty collection was piloted in 150 Old Navy stores in Q4, plus some select offerings in dedicated shop-in-shops.
“The pilot validated strong consumer interest, confirmed that beauty really enhances the engagement,” he said. “It's basket building and it's exciting our customers, and you'll hear a lot more about it as we move forward.”
Executives and analysts agreed that the focused effort to return the flagship Gap brand to a place of cultural standing is paying off. A key piece of evidence is that Gap saw its eighth straight quarter of comp increases in Q4. Dickson said the company is working on Athleta’s recovery, but expressed confidence in its turnaround. Brand chief Maggie Gauger, a Nike veteran who arrived last summer, recently met with Athleta’s founder as part of that effort, he said.
“The active category remains strategically important and resilient,” he said. “Even amid disruption, customers continue to make fashion choices that are active-oriented. Within that landscape, Athleta holds a meaningful position as the number five women's active brand — with distinction, as a women's-only brand rooted in quality, performance and design intent, exclusively for her.”
But Athleta’s performance wasn’t the only sign of weakness in the period. A comps miss at Old Navy reflects the extra financial pressure faced by lower-income consumers in the U.S., a large part of the brand’s audience, according to Emarketer principal analyst Sky Canaves. Elevating the entire portfolio using the cultural lens, with the help of its newly appointed chief entertainment officer and revamped loyalty program, will be Gap Inc.’s next challenge, Canaves said in emailed comments.
"It was not quite the holiday quarter that Gap hoped for with a mixed picture across brands,” Canaves said. “The emphasis on brand building and viral marketing campaigns accelerated the momentum for the flagship Gap brand and Banana Republic remains on track, though slower growth for Old Navy indicates that its target budget-focused customer is stretched thin and Athleta’s persistent declines signal a brand struggling deeply to set itself apart in the increasingly crowded and competitive activewear market.”
