
US speciality clothing retailer Gap Inc has reaffirmed its full-year guidance on the back of higher second-quarter profits and revenue, but an analyst has warned that “deep-seated problems” remain at its namesake brand.
For the 13 weeks ended 4 August, net income climbed 9.6% to US$297m, compared to $271m in the year-ago period. The company’s gross margin was 39.8%, an increase of 90 basis points compared with last year.
During the first quarter of fiscal 2018, Gap adopted a new revenue recognition standard, ASC 606. Excluding the impact of presentation changes from this adoption, gross margin was 38.8%, a decrease of 10 basis points compared with last year, largely due to the Gap brand.
Net sales, meanwhile, increased 8% to $4.1bn in the quarter, up from $3.8bn last year. Excluding the presentation changes, net sales were up 4%. Total comparable sales were up 2% compared with a 1% increase last year, marking the retailer’s seventh consecutive quarter of positive comparable sales growth.
Within this, comparable sales increased at both the Banana Republic and Old Navy brands, with Banana Republic up 2% compared to a decline of 5% last year, while Old Navy rose by 5%, the same rate as the prior year. At Gap, however, comps were down by 5% both this quarter and by 1% in the same period last year.
“We delivered our seventh consecutive quarter of positive comparable sales growth, led by the strength of Old Navy,” said CEO Art Peck. “Our balanced growth strategy supports continued growth and improved profitability, and our investments are focused on leveraging the advantages of our scaled operating platform and accelerating the impact of our significant data assets.”

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By GlobalDataMeanwhile, chief financial officer, Teri List-Stoll, said the second quarter played out largely as expected, and as a result, Gap is reaffirming its guidance on the year. “We are pleased with the meaningful improvement at Banana Republic, and our work to increase productivity is funding investments in the business to drive differentiation and continued growth.”
Gap continues to expect comparable sales for fiscal year 2018 to be flat to up slightly and reaffirmed its full-year diluted earnings per share guidance to be in the range of $2.55 to $2.70.
Time for a reset
But Neil Saunders, managing director of GlobalData Retail, notes that while Gap’s second-quarter results appear strong, they are inflated by the change in the way revenue is recognised. In addition, growth falls to around 3.4%, when currency fluctuations are taken into account. While such adjustments may seem pedantic they are important as they help give a true picture of how Gap is actually trading, he says.
“First, growth has slowed since the prior quarter – even though the consumer economy has strengthened. Second, growth is not evenly balanced across all parts of the business,” he explains.
One of the notable areas of weakness is the Gap brand in the US, where total sales rose by a “very modest” 1.2%. Moreover, global comparable sales at Gap were down by 5%, off the back of a 1% decline in the prior year.
“That the brand cannot deliver, even over a period of very robust consumer spending, is evidence that it is still broken,” he says. “A rising economic tide does float all retail boats, but it cannot float those with holes in them and, in our view, Gap is still a very leaky vessel.”
For Saunders, the main problem is still the merchandise. “The assortment continues to look samey and boring, with little effort being made to create newness or points of interest. This creates two problems. First, it discourages people from visiting and purchasing. Second, it means Gap struggles to charge full price and has to resort to continuous discounting to try and stimulate sales. Neither of these things is healthy.
“In our opinion, management needs to press Gap’s reset button. The brand is adrift and needs a much clearer identity and sense of purpose. This is now an urgent requirement as a lot of other apparel brands – like J Crew, American Eagle, and Abercrombie & Fitch – are all upping their game and producing more consumer-centric collections. While the market is moving forward, Gap is, at best, standing still. This shows in our data, which indicates satisfaction with Gap’s proposition is still declining.”