Gap Inc managed to turn a profit in the second quarter (Q2) ending 29 July, despite a slide in net sales as cost of goods and operating income decreased.
Gap Inc Q2 results overview
- Gap Inc posted a second-quarter profit of $117m compared with a net loss of $49m for the same period a year earlier
- Operating income was $106m versus an operating loss of $28m.
- Net sales, however, fell to $3.5bn compared with $3.9m for the same period a year earlier impacted by currency fluctuations and the sale of Gap China.
New president and CEO of Gap Inc, Richard Dickson, who was appointed at the end of last month commented: “We’re seeing encouraging signs of progress, as our teams streamline the way we work so we can focus on growth-driving initiatives – a virtuous cycle that we’ll look to become our norm. This means we have to do things differently, with a clear focus on redefining our brands’ meaning to consumers, focusing on creativity, designing for relevance as a pursuit rather than a goal, and leveraging our remarkable legacy to shape an exciting new future.”
Go deeper with GlobalData
Industry expert suggests Gap Inc’s CEO has mountain to climb
Neil Saunders, retail analyst at GlobalData shares his thoughts on how Gap Inc’s brands performed during the quarter.
“The first set of results announced under new CEO, Richard Dickson, are far from good. However, as he started his new role on 22 August, Dickson is absolved of any responsibility for the dire state of the company and its various brands. It does, however, leave him and his team with something of a mountain to climb in terms of rebuilding the business. His initial sentiments, stressing the need to do things differently and to redefine the brands so that they have meaning to consumers, are very sensible. We only hope that the usual inertia of Gap doesn’t grow like weeds over his ambitions.
“This quarter, overall sales declined by 8.0%. This is materially worse than the last quarter and comes off the back of an 8.4% decline in the prior year. On a two-year basis, company-wide sales are down by a painful 15.7%. While the apparel market has been challenged, this is a far worse performance than average and represents a significant erosion of market share.
“Unfortunately for Gap, all its brands are now firmly in decline.”
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By GlobalDataGap Inc Q2 industry analysis by segment
Athleta
Saunders explains Athleta operates in a growing part of the market and should be doing much better, but sales dipped by 2.4% over last year: “Not only does this position leave Gap without any engine to propel it forward, it also means that there are an awful lot of issues and problems to resolve across all parts of the business. This leaves management with something of a Gordian Knot to untangle.”
Old Navy
He explains sales declined by 5.5% in the US; and this comes off the back of a very sharp 13.6% decline in the prior year. Saunders notes the core family shopper at Old Navy is under a significant amount of financial pressure and has cut back on spending, but to nowhere near this degree. He says: “That means that part of Old Navy’s problem is that its shoppers are defecting to buy apparel elsewhere. While some of this is the result of people seeking out lower priced alternatives, some is also a consequence of boring ranges and styles at Old Navy. In our view, the brand has lost its edge and is churning out more of the same season after season, rather than being led by trends. This, combined with a more cautious consumer, is a losing combination.”
Gap
Sales declined by 4.1% in the US with Saunders stating selective store closures have not helped these numbers but neither has its lacklustre assortment.
“Like Old Navy, Gap is incredibly boring and does very little to entice customers into buying its products – especially not at the high full prices it charges, hence why it so often resorts to discounting to shift stock. The Gap brand has long been the problem child of the group, and its relevance in the market is one of the biggest issues new management will need to tackle if they want to turn around the fortunes of the company.”
Banana Republic
Sales dropped by 9.8%, putting a firm end to the mini-recovery the brand experienced last year. Saunders has some sympathy as a genuine effort has been made to enhance the experience, products, and the wider proposition at Banana. He continues: “Unfortunately, some initial effort has not been maintained and this, along with a softer market that is less interested in smart-casual, has put an abrupt end to growth.”
He concludes: “Despite woes on the sales line, Gap swung to a $117m profit this year against a loss of $49m last year. Better inventory management resulting in fewer markdowns and lower freight costs were helpful to the number. However, aside from this small comfort, Gap isn’t in a good place. It means the new CEO will have a baptism of fire as he starts the long hard slog of trying to restore a once iconic company to its former glory.”
Outlook
Katrina O’Connell, EVP and CFO, Gap Inc, said the company is encouraged by near-term progress but “we remain mindful of the mixed economic and consumer environment in which we are operating and continue to plan the business prudently.”
Gap Inc is estimating that third-quarter net sales could decrease in the low double-digit range compared to last year’s net sales of $4.04bn.
The company anticipates that fiscal 2023 net sales could decrease in the mid-single digit range compared to last year’s net sales of $15.6bn.
