Gap GPS Q1 earnings report 2023

Gap GPS Q1 earnings report 2023

The Gap logo is on display at a Gap store in Los Angeles, California on April 25, 2023.

Mario Tama | Getty Images

gap reported another quarter of net losses and declining sales across its four brands, but the retailer has persisted in making progress – and has managed to significantly improve its margins.

Here’s how the apparel retailer fared in the fiscal first quarter versus Wall Street expectations, based on a Refinitiv analyst poll:

  • Earnings per share: 1 cent adjusted versus an expected loss of 16 cents
  • Revenue: $3.28 billion versus $3.29 billion expected

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For the three-month period ended April 29, the company reported a loss of $18 million, or 5 cents a share, compared to a loss of $162 million, or 44 cents a share, in the prior-year period. On an adjusted basis, the company reported earnings of $3 million, or 1 cent per share, for the period.

Revenue fell to $3.28 billion, down 6% from $3.48 billion a year earlier.

The company’s shares are up more than 12% in after-hours trading.

Gap — which also owns eponymous brands Old Navy, Banana Republic, and Athleta — has been without a CEO for nearly a year as the company works to restructure the company, better understand its consumers, and become profitable again.

The company said the work is well underway, but acknowledged it has been a long time coming. Although the solutions are known, these corrections have been delayed or derailed for too long and too often, it said.

Last month, the company told investors it was laying off about 1,800 employees, more than three times the 500 layoffs announced in September, as part of a broader effort to cut costs and streamline operations.

Between this year and last, the company has cut 25% of its head office jobs, increasing the number of direct reports per manager from 2 to 4 and reducing management tiers from 12 to 8, the company said.

The cuts will eliminate red tape and bureaucracy, allowing Gap more flexibility in decision-making and focus on its creative endeavors, the company said.

In March, the company also announced a major leadership change. Athleta CEO Mary Beth Laughton left the company and the role of Chief Growth Officer was eliminated. Gap announced that its chief human resources officer, Sheila Peters, will also leave the company, but by the end of the year.

In its most recent quarter, comparable sales declined 3% and store sales declined 4% year-over-year.

Online sales, which accounted for 37% of total net sales, were also down 9% year over year, but the company said this was due to sales trends becoming closer to historical normal after the Covid pandemic became an industry-wide one rise in e-commerce. Digital sales have increased “significantly” to pre-pandemic levels, the company said.

In the year-ago period, many retailers were still grappling with pandemic-related supply chain issues, and Gap faced an oversupply of inventory that it was struggling to sell because it was out of season or out of style.

Many, like Gap, relied on promotions to clear their inventory, particularly at Old Navy, but last quarter the company was able to stay in line with price cuts — and benefit from lower air freight costs that have translated into better margins for retailers across the board industry.

Year-over-year, gross margins increased 5.6 percentage points to 37.1%. They also improved sequentially from the most recent quarter, when margins were 33.6%.

The company attributed the increase in margins to lower air freight costs and a slowdown in discounts, partially offset by continued inflationary costs.

Gap also continues to improve its inventories, which fell 27% year-over-year to $2.3 billion in the quarter.

How Gap’s brands have fared

  • Old Navy, which accounts for the majority of Gap’s revenue, saw net sales decline 1% to $1.8 billion and comparable sales decline 1%. Sales were strong in the women’s category, but gains were offset by a decline in activewear and children’s goods and a continued slowdown in consumer demand. Old Navy, which caters to low-income consumers, is more vulnerable to macroeconomic conditions.
  • gap reported revenue of $692 million, down 13% year-on-year and comparable revenue up 1%. Similar to Old Navy, the eponymous banner saw strength in the women’s category and softness in the active and children’s categories. According to the company, sales were also impacted by the closure of Gap stores.
  • Banana Republic reported revenue of $432 million, down 10% year-on-year. The company attributed the decline to an “outsized” 24% jump in sales in the year-ago period, which it said was due to a shift in consumer preferences as many returned to work and went out following the coronavirus lockdowns. Comparable sales declined 8%.
  • athlete is still lagging behind when it comes to what consumers are looking for. Net sales declined to $321 million, down 11% year over year, and comparable sales declined 13%. The decline in sales was attributed to ongoing problems with product acceptance.

Across its brands, Gap has conducted research to better understand its consumers so it can deliver the products they want, regain market share, and reverse revenue losses.

Gap’s full-year outlook was broadly unchanged from the guidance provided in March. The company expects net sales to decline in the mid- to high-single digits for the second quarter.

For the full year, the company continues to expect net sales to decline in the low to mid single digits.

The outlook is partially impacted by the company’s sale of Gap China. In the second fiscal quarter of 2022, net sales included US$60 million from Gap China, in fiscal 2022 it was US$300 million in sales.

Fiscal year 2023 will also feature a 53rd week, which is expected to increase sales by $150 million.

The company expects gross margin to continue to increase and capital expenditures to decrease to $500 million to $525 million compared to a previous range of $500 million to $550 million. The decline is due to the decision to open about five fewer Old Navy and Athleta stores during the fiscal year.

Read the full results announcement.