Gap (GAP) is showing signs of a comeback.
In the second quarter, revenue rose 5% to $3.72 billion, compared with estimates of $3.63 billion, while adjusted earnings per share came in at $0.54, compared with estimates of $0.40. Same-store sales rose 3%, also beating expectations for a 2.87% jump.
Chief Executive Officer Richard Dixon said on the earnings call that “our overall view of consumers and macroeconomic conditions largely remains the same” amid global uncertainty.
The company reiterated its forecast for fiscal 2024 for slight revenue growth.
Gap temporarily halted trading on Thursday after it posted its second-quarter earnings on its website around 9:30 a.m. ET, then retracted them. The company was originally scheduled to report after the market closed.
According to a Gap spokesperson, the results were inadvertently posted on the company’s website due to an administrative error that prompted the company to notify the NYSE and suspend trading.
The company then reissued the numbers and resumed trading. Shares ended the day up 2%.
The retailer’s share price is up more than 10% year-to-date, compared with a 62% jump at rival Abercrombie & Fitch Co. (ANF).
It’s the second straight quarter of sales growth as it tries to revive its brands.
Old Navy and its namesake Gap brand led growth, with same-store sales rising 5% and 3%, respectively.
The results are “a real indication that customers are responding well to our brand revitalization efforts,” said Dixon, who focuses the brands on contemporary styles. The company is “declaring Gap as the go-to destination for the baggy and plus-size trend,” he added.
Banana Republic posted steady sales growth as the company plans to focus on “fixing the fundamentals” and work to improve its “price and assortment architecture.”
Its premium lifestyle brand Athleta reported a 4% sales decline. It is expected to return the brand to positive same-store sales growth for the remainder of the year.
“The scale of the recovery in the third quarter has a number of results. So we’ll see how far that goes,” CFO Katrina O’Connell said of the premium brand.
The 55-year-old retailer has been working on a turnaround, including changing its New York Stock Exchange ticker last week.
Now it’s “GAP”, not a nod to the “GPS” navigation system, as Brian Sozzi reported.
“We’ve spent a lot of time refocusing our strategic priorities, restoring financial and operational rigor, allowing us to revitalize these brands to the point where we can revitalize them and be part of the cultural conversation,” Dixon, the manufacturer’s former chief operating officer of Mattel toys, told Yahoo Finance.
“Great product, great price, great storytelling, great in-store experiences. These are all fundamentals that we are working very hard to fix.”
Gross margin also beat estimates of 42.6%. The company increased its merchandise margin by 410 basis points during the year, led by lower raw material costs and improved promotional activity, according to the release.
Gap expects net sales to increase slightly in the third quarter of 2023 and gross margin to increase by 50 to 75 basis points.
Before the results, analysts were watching to see if Gap could still succeed in an environment where consumers are strained.
There is “a continued squeeze on the middle-income consumer,” Bernstein analyst Aneesha Sherman told Yahoo Finance.
“Consumers in the middle are the ones who have been hit again and again by a combination of inflation, student loan payments, credit card debt, the complete disappearance of savings from the pandemic, and a lack of improvement in general sentiment.” These consumers are now looking for value … and to be more discerning.”
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“We’re all operating against a backdrop of macroeconomic uncertainty,” Dixon told Yahoo Finance, adding that while Gap maintains caution about how consumers track, “there are always winners in any space.”
Morgan Stanley analyst Alex Stratton, who is overweight on the stock, sees earnings upside in the second half of the year given “growing confidence” in Dixon’s strategy and turnaround execution.
CFRA analyst Zachary Waring is less sanguine, reiterating a sell rating in a recent note, reflecting a “highly competitive specialty apparel retail market” that is primarily focused on young adults, he wrote.
He said “high sensitivity to economic conditions” and a drop in mall foot traffic could also affect the retailer.
Revenue Breakdown
Here’s what Gap reported, compared to what Wall Street expected, according to the Bloomberg consensus.
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Adjusted earnings per share: $0.54 vs. $0.40
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Income: $3.72 billion vs. $3.63 billion
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Same Store Sales Growth: 3% vs. 2.87%
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Old Navy: 5.00% vs. 4.76%
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gap: 3.00% vs. 4.09%
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Banana Republic: 0.00% vs 1.62%
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athlete: -4.00% vs -4.03%
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The company reiterated that it expects to end 2024 with slight revenue growth on a 52-week basis.
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @Brooke Di Palma or email her at [email protected].
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