Profit gap (GPS) Q4 2023

Gaps Biggest banner Old Navy returned to growth in its holiday quarter for the primary time in greater than a yr, because the retailer posted earnings on Thursday that were well above Wall Street expectations.

Sales at Old Navy rose 6% to $2.29 billion, and Gap’s overall gross margin rose 5.3 percentage points to 38.9% due to fewer markdowns and lower input costs. According to StreetAccount, analysts had expected a gross margin of 36%.

Shares of Gap rose about 5% in prolonged trading following the report.

Here’s how the retailer performed in its fiscal fourth quarter in comparison with Wall Street expectations, based on an analyst survey from LSEG, formerly often known as Refinitiv:

• Earnings per share: 49 cents versus expected 23 cents
• Sales: $4.3 billion versus expected $4.22 billion

The company’s reported net income for the three-month period ended Feb. 3 was $185 million, or 49 cents per share, compared with a lack of $273 million, or 75 cents per share, a yr earlier.

Revenue rose barely to $4.3 billion, up about 1% from $4.24 billion a yr ago. Like other retailers, Gap benefited from a 53rd week in fiscal 2023, and without it, sales would have declined within the quarter. The extra week contributed about 4 percentage points to growth within the fiscal fourth quarter, the corporate said.

According to StreetAccount, comparable sales were flat within the quarter, compared with estimates of a 1.1% decline. In-store sales rose 4%, while online sales fell 2% and accounted for 40% of total sales.

The retailer reduced its inventory levels by 16% in fiscal 2023, and with those levels now under control, Gap is working to remain on top of promotions and push full-price sales.

During the quarter, Gap recorded higher average selling prices across all of its brands and expects the corporate to extend its gross margin by at the very least half a percentage point in fiscal 2024.

“We were the experts at taking trendy basics and expressing them in a way that sparked cultural conversations. At best, we were a pop culture brand that did much more than just sell clothes, and as you know, we lost all of ours.” “Edge. We’ve evolved from a pop culture brand to an apparel retailer, and today we’re moving again,” CEO Richard Dickson told CNBC in an interview.

“We’re getting our spirits back.”

Heading into the vacation season, Gap struck a cautious tone with its outlook, warning of an “uncertain consumer environment” and reiterated those concerns on Thursday.

According to LSEG, the corporate expects revenue to be roughly flat for the present quarter, compared with estimates of a 0.2% decline. For the total yr, LSEG said sales are also expected to stay roughly flat on a 52-week basis, compared with estimates of a 0.5% increase.

“I think we need to look to 2023, where we have seen a lot of volatility and uncertainty in the environment. We’ve had inflation, student loan payments, high interest rates, we’ve had dwindling consumer savings. Now, fortunately, despite many predictions to the contrary.” “We didn’t experience a recession this year, but our industry was definitely affected,” Dickson said.

“While the apparel market is currently expected to contract in 2024, there are always winners in every market and we see how the consumer responds to new arrivals,” he said. “We see that innovative marketing drives traffic, and that inspires us to believe we are on the right track with our revitalization playbook.”

It has been just over six months since Dickson, the previous Mattel The boss credited with revitalizing the Barbie brand took over as Gap’s CEO, during which time he focused on bringing relevance back to the retailer’s legacy brands and getting them back on track for growth.

Last month, Gap announced it had named fashion designer Zac Posen as creative director and chief creative officer of Old Navy. Given its size and contribution to sales, Gap can’t succeed if Old Navy doesn’t win, and sales have been declining for more than a year, even at a time when consumers are hungry for bargains and affordable options.

Posen, who got his start designing couture gowns and specializes in women’s dresses, is a key addition to Dickson’s leadership team. He helps fill gaps in design and apparel, areas where Dickson lacks expertise, having spent most of his career at a toy company. He will also play a key role in revitalizing cultural relevance throughout the Gap, Dickson said.

“His creative expertise and clarity about culture have consistently evolved American fashion, making him a great fit for the company as we look to invigorate our culture of creativity and reinvigorate these heritage brands,” he told Dickson. “His role as Chief Creative Officer at Old Navy is to harmonize, orchestrate and enhance storytelling across product and marketing.”

Prior to Posen’s appointment, Dickson hired former LA Clippers CFO Eric Chan as Gap’s chief business and strategy officer. He also hired his former colleague Amy Thompson, Mattel’s former human resources chief, to fill the same role at Gap.

On the other hand, Gap has made progress in increasing its gross margin and streamlining its cost structure, but is struggling with a sharp decline in sales across its four brands: its namesake banner, Old Navy, Athleta and Banana Republic.

Gap and Old Navy have seen some signs of progress, but Athleta and Banana Republic have weighed on the overall business.

As for Banana, Dickson told CNBC he was “encouraged by the brand’s aesthetic direction,” but said it will take time for the brand to regain momentum.

“We need to get really strong in setting the fundamentals and strengthening those fundamentals to produce more consistent results,” Dickson said. “And that’s what we’re really going to focus on, our day-to-day execution, building on the lessons we learn.”

Athleta is still recovering after numerous leadership changes and a series of missteps in developing the right type of product in the right styles and colors. The target was also missed when it came to branches and marketing, said Dickson.

In August, Athleta named former Alo Yoga president Chris Blakeslee as its next CEO, and Dickson said the brand has made progress since he joined.

“We started the year with a much clearer palette and have seen early success with these full-price new arrivals, and we are encouraged by consumer response,” Dickson said. “I really like the direction the team is going. We have a new drop strategy that they have been testing, there are new innovations, the color has started coming into stores and we have responded really well to that.”

Here’s a closer look at each brand’s performance in the fourth quarter:

• Old Navy: According to StreetAccount, revenue rose 6% to $2.29 billion, while comparable sales rose 2%, above estimates of 1%.
• Gap: Sales fell 5% to $1.01 billion, weighed down by the sale of the brand’s China business, while comparable sales rose 4%, well above estimates of 1.3%, StreetAccount said . The brand recorded strength in the women’s category.
• Banana Republic: According to StreetAccount, revenue fell 2% to $567 million, while comparable sales fell 4%, better than the 6.7% decline analysts had expected. The company noted that Banana has made progress in “improving its aesthetics,” but restoring the brand “will take time and there remains to be work to be done to raised execute on most of the fundamentals.”
• Athlete: Sales fell 4% to $419 million, while comparable sales fell a whopping 10%. Gap noted that Athleta’s performance improved in comparison with the previous quarter, but said sales were sluggish because the brand sought to carry the road on pricing and move past a previous period of increased discounting.

Correction: This story has been updated to correct the spelling of clothier Zac Posen’s name.