May 25, 2023
Gap’s Better-Than-Expected Results Signal Cost Cuts Paying Off
(Bloomberg) -- Gap Inc. reported better-than-expected results in the first quarter, showing the retailer’s cost-cutting measures are sparking improved performance.
Gross margin in the period came in above the average analyst estimate, while adjusted earnings per share were slightly positive, compared with an expected loss. The improvement was due in part to lower air freight expense and fewer discounts, the company said. Gap has also reduced headcount and trimmed expenses.
The shares rose 12% in premarket trading early Friday in New York.
Comparable sales, meanwhile, declined by 3% across Gap’s four brands. That was due mostly to large drops at Banana Republic and Athleta, while Old Navy fell slightly and the Gap brand posted a 1% increase. The results suggest that Gap will need to do more beyond cost-cutting measures to reposition its brands for longer-term growth.
“We continue to take the necessary actions to drive critical change at Gap Inc., ultimately getting us back on a path toward delivering consistent results long-term,” interim Chief Executive Officer Bob Martin said in a statement.
Martin has been serving in the interim role for nearly a year. The company said it continues to search for a new CEO and looks forward “to the time when we will introduce this great company’s next leader.”
Inventories in the period through April 29 declined 27% — the second consecutive drop following four quarters of double-digit increases. That’s another positive sign for investors, given Gap’s past struggles with excess merchandise.
In the current quarter, Gap said net sales could decrease in the mid-to-high single-digit range, in part due to the sale of Gap China early this year. The unit generated $60 million in sales in the same period in 2022, hurting the year-over-year comparison. For the full year, Gap expects a net sales decline in the low-to-mid single-digit range and continued margin improvement.
In April, the company said it would eliminate about 1,800 positions, part of a broader restructuring plan expected to save about $300 million in annual expenses.
Gap’s results come after other major US apparel retailers — including Urban Outfitters Inc., Kohl’s Corp. and Abercrombie & Fitch Co. — reported earnings that largely exceeded expectations this week. Investors have been optimistic about profitability improvements across the industry, despite low or negative sales growth.
(Updates with share move)
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