Old Navy, Gap’s largest brand, returned to growth for the first time in over a year during its holiday quarter, exceeding Wall Street’s expectations with impressive earnings reported on Thursday. Sales at Old Navy surged by 6% to $2.29 billion, contributing to Gap’s overall gross margin increase of 5.3 percentage points to 38.9%, primarily due to reduced markdowns and lower input costs. This performance surpassed analysts’ projected gross margin of 36%, according to Street Account.
Following the report, Gap’s shares surged approximately 5% in extended trading. In its fourth fiscal quarter, the retailer outperformed Wall Street’s estimates:
- Earnings per share: 49 cents vs. 23 cents expected
- Revenue: $4.3 billion vs. $4.22 billion expected
The company reported a net income of $185 million, or 49 cents per share, for the three-month period ending February 3, compared to a loss of $273 million, or 75 cents per share, in the same period the previous year. Sales increased slightly to $4.3 billion, up approximately 1% from the previous year’s $4.24 billion, with the benefit of an additional week during fiscal 2023 contributing about four percentage points of growth during the quarter.
Comparable sales remained flat during the quarter, contrary to estimates of a 1.1% decline, according to Street Account. In-store sales increased by 4%, while online sales decreased by 2%, representing 40% of total revenue. The company reduced inventory by 16% during fiscal year 2023 and aims to maintain this level while minimizing promotions and focusing on full-price sales.
During the quarter, Gap witnessed higher average selling prices across all its brands and anticipates a gross margin growth of at least half a percentage point in fiscal 2024. CEO Richard Dickson expressed optimism in an interview with CNBC, stating, “We were the authorities of taking on-trend basics, expressing it in ways that drove cultural conversations… We’re getting our vibe back.”
Richard Dickson, President and CEO of Gap Inc., remarked,
“The fourth quarter surpassed expectations across key metrics, demonstrating improved performance at Old Navy and Gap, as well as notable advancements in margins and cash flow. While acknowledging the work that lies ahead, I am encouraged by the team’s dedication and enthusiastic about the opportunities that lie ahead.”
This year, the company remains committed to bolstering its core strengths by focusing on four strategic priorities: maintaining and enhancing financial and operational discipline, revitalizing the brand, strengthening the platform, and fostering a dynamic organizational culture.
A closer look at each brand’s performance during the fourth quarter:
- Old Navy reported a 6% increase in sales, reaching $2.29 billion, with comparable sales rising by 2%, surpassing the estimated 1% growth, as reported by StreetAccount.
- Gap experienced a 5% decline in sales, amounting to $1.01 billion, attributed to challenges in its China business. However, comparable sales surged by 4%, surpassing expectations of a 1.3% decline, as indicated by StreetAccount. The brand particularly excelled in the women’s category.
- Banana Republic‘s sales decreased by 2% to $567 million, with comparable sales down by 4%, performing better than the anticipated 6.7% decline projected by analysts, according to StreetAccount. The company acknowledged progress in elevating the brand’s aesthetic but emphasized the need for further efforts to enhance execution of fundamental strategies.
- Athleta recorded a 4% decrease in sales, totaling $419 million, while comparable sales witnessed a substantial 10% decline. Gap acknowledged an improvement in Athleta’s performance compared to the previous quarter but noted sluggish sales due to the brand’s emphasis on maintaining pricing integrity and overcoming a period of heightened markdowns.