Sales to GapOld Navy’s largest brand, failed to meet expectations in its fiscal first quarter, leading the retailer to cut its sales forecast Thursday.
During the quarter, Old Navy’s comparable sales rose 1%, while analysts expected growth of 3%, according to StreetAccount.
As a result, Gap lowered its sales outlook and now expects company-wide sales growth of between 1% and 2%, down from a prior range of between 2% and 3%.
Gap’s stock fell more than 14% in extended trading following the results.
In an interview with CNBC, CEO Richard Dickson attributed weak sales to a spring and summer assortment that failed to please shoppers — not a broader macroeconomic problem.
“It’s not a consumer issue,” Dickson said. “We win with all income cohorts, low, middle and high. When you have the right product at the right price equation, the customers are there, and our seasonal categories have had a weaker start.”
While Old Navy caters to low- and middle-income shoppers, who have felt economic shocks like soaring gas prices more acutely than higher-income cohorts, these customers continue to shop — only in different categories.
Dickson said sales of Old Navy swim dresses and shorts were particularly weak, while the active, denim and children’s categories were strong. He said the brand was working to boost sales with better pricing and marketing and that trends were starting to improve.
Still, as Old Navy’s slowdown persists into the current quarter, the company is taking a “moderate view” of the year, Dickson said. Knowing that the brand represents nearly 60% of Gap’s overall turnover, any pressure on Old Navy impacts the entire company.
If Gap has lowered its sales outlook for the year, its profitability is another story. The company raised its guidance and now expects adjusted earnings per share of between $2.30 and $2.40, up from a prior range of between $2.20 and $2.35.
Here’s how the specialty apparel company performed in the fiscal first quarter compared to what Wall Street expected, based on a survey of analysts by LSEG:
- Earnings per share: 38 cents adjusted versus 37 cents expected
- Income: $3.50 billion versus $3.52 billion expected
Sales reached $3.50 billion, up slightly from $3.46 billion a year earlier.
The company’s reported net income for the three months ended May 2 was $339 million, or 90 cents per share, compared with $193 million, or 51 cents per share, a year earlier. Excluding one-time items related to a large legal settlement, Gap reported earnings per share of 38 cents.
Finance director Katrina O’Connell attributed the expected profit rise to the favorable tax rate and interest income. The company expects an $80 million profit from the reduction in tariff rates, but said it did not factor that into its forecast and was reserving it instead. Half will be set aside to account for rising fuel prices, while the other half will be reserved in case the company needs to run promotions to stimulate demand.
Here’s a closer look at how each brand performed.
Gap: Comparable sales at Gap’s namesake brand, at the center of its turnaround, climbed 10% during the quarter, far better than the 5.5% growth expected by analysts, according to StreetAccount. Overall sales also increased 10% to $796 million. Adequate marketing and better presence in key categories like denim, fleece and kids were the drivers of the quarter.
Banana Republic: Comparable sales were lower than the workwear brand, growing 2% compared to analysts’ expectations of 4%, according to StreetAccount. Overall sales increased 1% to $431 million. This marks Banana Republic’s fourth consecutive quarter of positive comparable sales. Earlier this month, Gap announced that former PVH Americas CEO Donald Kohler had been named the brand’s next CEO. “We are improving in women’s, especially pants and sweaters which have performed well,” Dickson said. “[Kohler] brings incredible and deep experience across luxury, high-end and specialty retail and we are truly excited to have him lead the next chapter of the brand.
Athlete : Sales of Gap’s athleisure brand continued to suffer. Comparable sales declined 11% while overall sales fell 12%. New CEO Maggie Gauger, a Nike veteran, has worked to streamline the assortment, and Dickson expects some improvement in the second half. “It’s in the hands of the consumer,” he said. “We just have to deliver that to them, and then we’ll see how they respond.”
Former Navy: Sales rose 1% to $2 billion, while comparable sales rose 1%, worse than expected.