Sales at Gap‘s largest brand Old Navy fell short of expectations during its fiscal first quarter, leading the retailer to cut its sales guidance on Thursday.
During the quarter, Old Navy’s comparable sales grew 1%, while analysts expected them to grow 3%, according to StreetAccount.
As a result, Gap cut its sales outlook and is now expecting companywide sales to grow between 1% and 2%, down from a prior range of between 2% and 3%.
Gap’s stock dropped more than 14% in extended trading following the results.
In an interview with CNBC, CEO Richard Dickson attributed the sluggish sales to a spring and summer assortment that failed to land with shoppers – not a larger macroeconomic issue.
“It’s not a consumer issue,” said Dickson. “We’re winning with all income cohorts across low, middle, and high. When you have the right product at the right price value equation, customers are there, and our seasonal categories just got off to a weaker start.”
While Old Navy caters to lower- to middle-income shoppers, who have felt economic shocks like soaring gas prices more acutely than higher-income cohorts, those customers are still shopping — just in different categories.
Dickson said sales of Old Navy’s dresses and swimming shorts were particularly weak, while active, denim and kids categories were strong. He said the brand is working to boost sales with better price points and marketing and has seen trends start to improve.
Still, as Old Navy’s slowdown has persisted into the current quarter, the company is taking a “moderated view” of the year, Dickson said. Considering that the brand accounts for almost 60% of Gap’s overall revenue, any pressure on Old Navy impacts the entire company.
While Gap cut its sales outlook for the year, its profitability is another story. The company raised its guidance and is now expecting adjusted earnings per share to be between $2.30 and $2.40, compared with a prior range of between $2.20 and $2.35.
Here’s how the specialty apparel company performed during the fiscal first quarter compared with what Wall Street was anticipating, based on a survey of analysts by LSEG:
- Earnings per share: 38 cents adjusted vs. 37 cents expected
- Revenue: $3.50 billion vs. $3.52 billion expected
Sales rose to $3.50 billion, up slightly from $3.46 billion a year earlier.
The company’s reported net income for the three-month period that ended May 2 was $339 million, or 90 cents per share, compared with $193 million, or 51 cents per share, a year earlier. Excluding one-time items related to a hefty legal settlement, Gap saw earnings per share of 38 cents.
Chief Financial Officer Katrina O’Connell attributed the higher earnings forecast to tax rate favorability and interest income. The company is expecting an $80 million benefit from reduced tariff rates, but she said she didn’t factor that into the guidance and is instead reserving it. Half will be put aside to account for higher fuel prices, while the other half will be reserved in case the company needs to dial up promotions to stimulate demand.
Here’s a closer look at how each brand performed.
Gap: Comparable sales at Gap’s namesake banner, the center of its turnaround, soared 10% during the quarter, far better than the 5.5% growth analysts had expected, according to StreetAccount. Sales overall grew 10% as well to $796 million. The right marketing and a better presence in key categories like denim, fleece and kids drove the quarter.
Banana Republic: Comparable sales fell short at the workwear brand, growing 2% while analysts had expected 4%, according to StreetAccount. Overall sales grew 1% to $431 million. It’s the fourth consecutive quarter of positive comparable sales at Banana Republic. Earlier this month, Gap announced the former CEO of PVH Americas, Donald Kohler, was appointed to be the brand’s next CEO. “We’re getting better in women’s, including pants and sweaters in particular that performed well,” said Dickson. “[Kohler] brings incredible, deep experience across luxury, premium, specialty retail and we’re really excited for him to lead the brand’s next chapter.”
Athleta: Sales at Gap’s athleisure brand continued to suffer. Comparable sales were down 11% while overall sales fell 12%. New CEO Maggie Gauger, a Nike veteran, has worked to streamline the assortment, and Dickson expects some improvement in the back half of the year. “It’s in the hands of the consumer,” he said. “We’ve just got to deliver that to them, and then we’ll see how they respond.”
Old Navy: Sales grew 1% to $2 billion, while comparable sales were up 1%, worse than expected.
