Holiday Quarter Magic Got Gap On Track To Reinvigorate Its Brands

Last Thursday, The Gap Inc GPS topped analyst estimates with its fourth fiscal quarter results thanks to financial and operational discipline, along with a demand rebound for its namesake brand. The clothing retailer has been losing customers to its rivals, such as Shein and Amazon.com Inc AMZN and although it still isn’t back to sales growth, its margins are showing it is getting better. Although Gap did start to turn things around, it is also expecting a rough year ahead for consumers, like its peers Ross Stores Inc ROST, as well as Victoria’s Secret & Co VSCO who along with Foot Locker FL had a rough quarter.

Fiscal Fourth Quarter Highlights

For the quarter ended on February 3rd, Gap saw a tiny YoY increase of 1% in sales that amounted to $4.3 billion, but still surpassing LSEG’s estimate of $4.22 billion. But, the increase is owed to an additional week during fiscal 2023 that benefited Gap’s retail peers as well. However, Old Navy grew 6% to $2.29 billion and more importantly, returned to growth for the first time in more than a year.

With fewer markdowns and lower input costs. overall gross margin surged 5.3 percentage points to 38.9%, surpassing StreetAccount’s estimate of  36%. As a result, Gap went from last year’s loss to a net income of $185 million, or 49 cents per share, smashing LSEG’s estimate of 23 cents.

Comparable sales remained flat, which is better than StreetAccount’s estimate of a drop. In-store sales rose 4% but online sales contracted 2%, making 40% of total revenue.

Brand Segmentation

Old Navy sales expanded 6% to $2.29 billion with comparable sales rising 2%.

Gap sales contracted 5% to $1.01 billion, but comparable sales rose 4%.

Banana Republic sales also contracted 2% to $567 million with comparable sales also dropping 4%. Re-establishing the Banana Republic brand for it to shine in the premium lifestyle space will take more time, with the CEO Richard Dickson acknowledging that it is behind on the fundamentals.

Although having improved from the previous quarter, Athleta sales dropped 4% to $419 million with comparable sales tanking 10% as the brand is holding the pricing fort.

A Muddy Outlook

For both the current quarter and fiscal year, Gap is expecting sales to be roughly flat as apparel market is expected to decline this year. Even Urban Outfitters Inc URBN is thinking of revamping its namesake stores after having observed consumers are no longer as cheery as they were after getting out of the pandemic. Unlike Gap, Urban Outfitters missed estimates with its latest earnings report. Ross Stores Inc also opted for a conservative approach due to seeing consumers being pressured with increased costs of living. Victoria & Secret also provided a cautious outlook in response to weakened demand in North America.

Gap seems to be on track to reinvigorate its brands.

Gap is expecting grow its gross margin by at least a half percentage point in fiscal 2024. It did a good job at improving its gross margin and cost structure last year, along with strengthening its marketing efforts that sparked enthusiasm from women shoppers, but it’s still far from getting its mojo back.

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