Net income climbed 14.7% to US$164m in the first quarter

Net income climbed 14.7% to US$164m in the first quarter

Gap Inc has reaffirmed its full-year guidance on the back of higher first-quarter profits and revenue, but one analyst warns while the US speciality clothing retailer is in a better position than it was a year ago, management talks a better game than it is actually playing.

For the 13 weeks ended 5 May, net income climbed 14.7% to US$164m, compared to $143m in the year-ago period. The company's gross margin was 37.7%, a decrease of 20 basis points compared with last year. 

Net sales were also up, increasing 10% to $3.8bn from $3.4bn last year.

During the first quarter, Gap adopted a new revenue recognition standard, ASC 60. In its earnings release, the retailer said that while the standard has a "significant impact" on the presentations of certain line items of the consolidated statements of income, it does not have a material impact to net income.

However, Gap said the adoption has resulted in an increase of $141m in net sales. Excluding this impact, net sales increased 6% compared with last year. Sales were also boosted by a positive foreign exchange impact to the tune of $40m.

Total comparable sales, meanwhile, were up 1% compared with a 2% increase last year, marking the retailer's sixth consecutive quarter of positive comparable sales growth.

Comparable sales increased at both the Banana Republic and the Old Navy brands, with Banana Republic sales up 3% compared to a decline of 4% last year, while Old Navy comp sales rose by 3% versus an 8% rise last year. At Gap, sales were down by 4% both this year and last.

"We are pleased to have delivered our sixth consecutive quarter of positive comp growth, despite the expected challenges at Gap brand," said CEO Art Peck. "Our balanced growth strategy provides the right foundation to differentiate our portfolio of brands in this retail environment, with strategic investments in value, active and digital fuelled by productivity opportunities unique to our scaled operating platform."

Meanwhile, chief financial officer, Teri List-Stoll, added that despite the pressures the retailer faced in the first quarter, it is affirming its full-year guidance; a move she says reflects Gap's confidence in the underlying fundamentals of the business as well as the benefits of executing against its balanced growth strategy.

As a result, 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.

Neil Saunders, managing director of GlobalData Retail, notes although Gap's headline sales growth looks very strong, the reality is that it is inflated by both currency gains and a change in the way revenue is accounted for.

He adds, as neither of these things reflects a true upswing in trading, it is necessary to strip them out to get a realistic appreciation of performance. When this is done, the 9.9% growth rate translates into a more subdued 4.7% increase. "This isn't bad, but it is not quite so robust - especially when it comes off the back of a weak prior year comparative," Saunders explains.

But the more "lacklustre" headline sales number is reflected in the comparable sales figures. "In our view, this is a mixed set of numbers that underlines the fact that Gap still has a very mixed set of brands some of which need a lot more work than others," he says.

While Saunders says Old Navy booked a "good" result, with its proposition still resonating with consumers, he notes it's too early to call Banana's recovery sustainable and warns there is a long way to go before Gap is back to full health.

"The blunt truth is that on the ground little seems to have changed at Gap. The product mix still consists of the same boring basics, there is an absence of fashion trends, base prices remain out of kilter, and discounting is rife. While Gap's management notes that the brand is in transition and discounting is necessary to sell down excess inventory, we are not confident that the strategy is anywhere near optimal. In short, Gap is still a brand struggling for relevance."

He adds: "Overall, we believe that Gap is in a better position than it was a year ago. However, we also believe that management talks a better game than it is actually playing."

Shares in the retailer were down by 7.7% in pre-market trading but have since regained their upward trajectory, climbing 3%.