Gap Inc. announced its fifth consecutive quarter of positive same-store sales and its sixth consecutive quarter of gross margin expansion in Q4 thanks to a strong holiday period. Fourth quarter net sales rose 8% to $4.78 billion (besting the analyst forecast cited by CNBC for $4.67 billion) and same-store sales rose 5% after a 2% rise in the year-ago quarter (besting the 1.7% expectation cited by CNBC). The sales boost from a 53rd week in the period was largely offset by the impact from international closures last year, the company said.
By brand in the quarter, Old Navy global same-store sales rose 9% after a 5% rise last year; Gap global same-store sales were flat in the fourth quarter as they were in the same period last year (due at least in part to inventory issues in January); and Banana Republic global same-store sales in the quarter rose 1% after falling 3% last year, according to a company press release.
Gap's Q4 net income fell to $205 million, or 52 cents per share, compared with $220 million, or 55 cents per share in the year-ago quarter. Excluding the net provisional impacts related to tax reform (a charge of $34 million) and a second quarter benefit from insurance proceeds related to the Fishkill fire of $64 million, the company's adjusted diluted earnings were 61 cents per share for the fourth quarter, besting analyst expectations cited by CNBC for 58 cents.
Old Navy has been elevated in the growth strategy outlined by Gap Inc. last summer — the company opened 30 new Old Navy stores last year — and the brand is proving its mettle with soaring same-store sales. "Given the excellent returns we're seeing and the fact that the brand remains under penetrated versus peers, we see significant expansion opportunity and plan to double the number of openings in 2018," CEO Art Peck told analysts in a conference call on Thursday, according to a transcript from Seeking Alpha. "Old Navy is the fastest-growing major apparel brand in the U.S. among major retailers. The brand continues to win."
Cowen & Co. analysts also see Old Navy's value proposition and speedy supply chain as key advantages in comments emailed to Retail Dive, and said that the company's overall "commitment to data analytics, omnichannel retailing, and CRM sophistication" is impressive. "We think their early investments and diligent focus will pay off over the longer term, especially as they leverage their brand portfolio," according to Cowen's note.
While all brands released positive results, Athleta, the company's athleisure brand, is particularly fierce, and appears to be giving Lululemon a run for its money at a time when the innovator of the category is in search of a new chief executive after the ouster last month of CEO Laurent Potdevin. Athleta, whose activewear apparel generally beats Lululemon's on price, moved from mid-teens sales growth in the first half of 2017 to mid-20s in the back half of the year, and Peck called the response and engagement from new and existing customers "outstanding."
The brand, like Lululemon, is becoming known for performance fabrics, many of them proprietary, which Peck said drove a "significant amount of top-line performance." Last year, the company established a "small very focused innovation center" to develop proprietary technical fabrication and sustainability innovation for activewear and core ready-to-wear apparel, and Peck noted particular success with its "Powervita" and "Sculpt" fabrics. Cowen & Co. analysts on Thursday also called out the company's activewear technology as a competitive advantage.
The company is also scoring with its girls business in the space, a segment wound down by Lululemon last year to sell only online and in select stores, as sales more than doubled year over year. Gap Inc. debuted its Athleta Girl line in 2016 and Peck said the growth has been "highly accretive," adding that the company is also bringing more activewear to its Gap and Old Navy brands.
Gap Inc. expects the 25 planned store openings in fiscal 2018 to be focused on Athleta and Old Navy locations, with closures weighted toward Gap brand and Banana Republic, according to the release. The company opened 53 company-run stores globally in the fourth quarter and closed 81, bringing its total to 3,193.