Selling to The gapOld Navy’s flagship product fell short of expectations during its first fiscal quarter, leading the retailer to cut its sales guidance on Thursday.
During the quarter, Old Navy’s same-store sales grew 1%, while analysts were expecting a 3% increase, according to StreetAccount.
As a result, Gap lowered its sales outlook and now expects company-wide sales to grow between 1% and 2%, down from a previous range of between 2% and 3%.
Gap shares fell more than 14% in extended trading following the results.
In an interview with CNBC, CEO Richard Dickson indicated that the weak sales were related to the spring and summer assortment that failed to catch on with consumers – not a major economic problem.
“It’s not about consumers,” said Dickson. “We’re winning with all income groups between low, middle, and high. If you have the right product at the right price point, the customers are there, and our seasonal categories are just starting to slow down.”
While Old Navy caters to low- to middle-income shoppers, who have felt economic shocks like rising gas prices more than higher-income groups, those customers are still shopping — just in different segments.
Dickson said sales of Old Navy swimwear and shorts were weak, while the active, denim and children’s categories were strong. He said the brand is working to increase sales through better pricing and marketing and has seen trends start to improve.
Still, as Old Navy’s decline continues into the current quarter, the company is taking a “limited view” for the year, Dickson said. Considering that the brand accounts for about 60% of Gap’s total revenue, any pressure on Old Navy has implications for the rest of the company.
While Gap lowered its sales outlook for the year, its profits are another story. The company raised its guidance and now expects adjusted earnings per share to be between $2.30 and $2.40, compared to a previous range of between $2.20 and $2.35.
Here’s how the specialty goods company performed during the first fiscal quarter compared to Wall Street’s expectations, based on a survey of LSEG analysts:
- Earnings per share: 38 cents adjusted versus 37 cents expected
- Net worth: $3.50 billion versus $3.52 billion expected
Sales rose to $3.50 billion, up slightly from $3.46 billion last year.
The company’s reported net income for the three months 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 large legal settlement, Gap saw earnings per share of 38 cents.
Chief Financial Officer Katrina O’Connell says the higher revenue forecast is related to tax rate approvals and interest income. The company expects to realize an $80 million profit from the price cuts, but said it did not include it in guidance and instead is holding back. A portion will be set aside to manage high fuel prices, while the rest will be reserved in case the company needs to dial up promotions to stimulate demand.
Here’s a closer look at how each product performed.
Gap: Comparable sales at Gap’s namesake banner, which is the focus of its turnaround, rose 10% during the quarter, better than the 5.5% growth analysts were expecting, according to StreetAccount. Total sales grew by 10% and reached $796 million. Better marketing and better presence in key categories like denim, fleece and kids drove the quarter.
Banana Republic: Comparable sales fell at the workwear company, growing 2% while analysts were expecting 4%, according to StreetAccount. Total sales grew 1% to $431 million. It’s the fourth quarter in a row of good comparable sales for Banana Republic. Earlier this month, Gap announced former CEO of PVH Americas, Donald Kohler, has been named the brand’s next CEO. “We are getting better and better for women, including pants and sweaters that are doing well,” said Dickson. “[Kohler] he brings an incredible, deep understanding of all things luxury, premium, and exclusive and we’re excited for him to lead the brand’s next chapter.”
Athlete: Sales of Gap’s athleisure brand continued to struggle. Comparable sales were down 11% and total sales were down 12%. New CEO Maggie Gauger, a Nike veteran, has worked to streamline diversification, and Dickson expects some improvement in the back half of the year. “It’s in the hands of the consumer,” he said. “We’ll have to bring that to them, and see how they respond.”
Old Navy: Sales grew 1% to $2 billion, while comparable sales rose 1%, worse than expected.
