Dive Brief:
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Despite spring fashion misses, Old Navy Q1 net sales reached $2 billion, up 1% year on year; comps also rose 1%. Still, results disappointed the company and analysts.
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The powerhouse of the period was the Gap brand, where net sales, like comps, soared 10%, reaching $796 million — its 10th straight quarter of positive comps. Banana Republic also gained strength, with net sales up 1% and comps up 2%.
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Athleta continues to struggle, with net sales down 12% and comps down 11%, though Gap Inc. CEO Richard Dickson nevertheless expressed confidence in the brand and some analysts anticipate a return to growth later this year.
Dive Insight:
Merchandising and pricing flubs at Old Navy were the result of internal mistakes and not the brand’s value-minded customers taking a step back in a worrying economy, Dickson insisted during a call Thursday.
“Seasonal categories have gotten off to a weaker start, in particular dresses, and, bluntly, we have not had the right fashion and value equation for that category,” Dickson said. “The team is moving quickly, obviously, to drive better conversion, sharper price points, stronger messaging, and as these changes have begun to take hold, we have seen the trends improve.”
Whatever the cause, the issues lingered into Q2, a problem for Gap Inc. given that its value brand accounts for well over half of its top-line.
Overall company net sales edged up 1% year over year to $3.5 billion and comps rose 2%. Sales at stores, which rose 3%, outpaced e-commerce, which dropped 2% and were nearly 40% of the total. Gap Inc. gross margin contracted 130 basis points to 40.5%. This exceeded the company’s outlook, but didn’t match up to gross margin performance at rivals, per some analysts.
Old Navy’s comps may have fallen by double digits in early May, and difficult-to-move merchandise likely included swim, shorts and other seasonal items, according to Evercore ISI analysts led by Michael Binetti. The Old Navy teams tend to address their mistakes quickly and comps likely improved to a run rate of flat to slightly positive over the last week, they said in a client note Friday.
“It was a broader miss than just a misdiagnosis on this season’s must-have dress styles,” Binetti said.
The trouble may be connected to not just fixable misses but also broader trends, including the fact that “offpricers are taking outsized bites out of Old Navy sales,” he also said. Wells Fargo analysts led by Ike Boruchow also wonder if retailers like Ross were a factor in the quarter.
This is the second straight quarter of disappointment at Old Navy and Dickson’s “first real issue since taking the helm” three years ago, Boruchow said in a client note Thursday. The brand’s slower-growing comp sales could weigh on near-term comps and margins.
“While there is strength elsewhere (Gap, Banana Republic), this is a clear problem which will grow larger should problems persist past 2Q,” Boruchow said.
Indeed, at least for this quarter, little of that could overshadow Gap, where there was strength across denim, fleece, kids and baby. Dickson associated the success in fleece with the brand’s “Sweats like this” music video featuring Young Miko.
The brand is building on that by introducing a bag assortment and relaunching its fragrance business. The latter is expected in the fall, with new packaging, formulations and stand-alone merchandising in stores, but a return to cult favorite scents like Dream, Grass, Heaven and Om, Dickson said.
“What I would say is Gap is back on the forefront of the cultural conversation,” he said. “It is clearly on a roll as an iconic American brand. We see significant runway ahead as we continue to build momentum through great product, great storytelling, and of course, great execution.”
