Gap (GPS) Q4 2023 Earnings

Gaps Biggest brand Old Navy returned to growth for the first time in more than a year during its holiday quarter, as the retailer posted earnings Thursday well above Wall Street expectations.

Sales at Old Navy grew 6% to $2.29 billion, and Gap's overall gross margin rose 5.3 percentage points to 38.9% thanks to fewer markdowns and lower input costs. Analysts were expecting a gross margin of 36%, according to StreetAccount.

Gap shares rose about 5% in extended trading following the report.

Here's how the retailer fared in its fiscal fourth quarter compared to what Wall Street expected, according to a survey of analysts by LSEG, formerly known as Refinitiv:

• Earnings per share: 49 cents vs. 23 cents expected
• Revenue: $4.3 billion compared to the expected 4.22 billion dollars

The company's reported net income for the three months ended Feb. 3 was $185 million, or 49 cents per share, compared with a loss of $273 million, or 75 cents per share, a year before.

Sales rose slightly to $4.3 billion, up about 1% from $4.24 billion a year earlier. Like other retailers, Gap benefited from a 53rd week during fiscal 2023, and without it, sales would have declined during the quarter. The additional week contributed about four percentage points of growth during the fiscal fourth quarter, the company said.

Comparable sales during the quarter were flat, compared to estimates of a 1.1% decline, according to StreetAccount. In-store sales increased 4%, while online sales decreased 2% and represented 40% of total revenue.

The retailer decreased inventory by 16% during fiscal 2023, and with those levels now under control, Gap is working to maintain promotions and drive full-price sales.

During the quarter, Gap posted higher average selling prices across all of its brands and expects to increase its gross margin by at least half a percentage point in fiscal 2024.

“We were the authorities on taking fashion basics, expressing them in a way that drove cultural conversations. At our best, we were a pop culture brand that did much more than sell clothes and, as you know, we all know, we lost our” We went from being a pop culture brand to a clothing retailer, and today we're moving again,” CEO Richard Dickson told CNBC in an interview.

“We're getting our vibe back.”

Heading into the holiday season, Gap took a cautious tone in its outlook, warning of an “uncertain consumer environment” and on Thursday reiterated those concerns.

In the current quarter, it expects sales to remain broadly flat, compared to estimates of a 0.2% decline, according to LSEG. For the full year, it also expects sales to remain broadly stable, over a 52-week period, compared to estimates of a 0.5% increase, according to LSEG.

“I think we have to look ahead to 2023, where we saw a lot of volatility and uncertainty in the environment. We have inflation, student loan payments, high interest rates, we had dwindling consumer savings. Now, fortunately, despite many predictions in opposite direction “We haven't seen any recession during the year, but our industry has clearly been affected,” Dickson said.

“Although the apparel market is currently expected to decline in 2024, there are always winners in every market and we are seeing the consumer react to the novelty,” he said. “We're seeing innovative marketing driving traffic and inspiring us to believe we're on the right path with our revitalization playbook.”

It's been just over six months since Dickson, the former Mattel The boss credited with resurgence of the Barbie brand has taken over as CEO of Gap and, during that time, has focused on returning the retailer's legacy brands to relevance and returning them to growth.

Last month, Gap announced that it had tapped fashion designer Zac Posen as its chief creative officer and chief creative officer of Old Navy. Given its size and contribution to revenue, Gap can't succeed if Old Navy doesn't win, and for more than a year, sales have been down even at a time when consumers are hungry for bargains and affordable options.

Posen, who began designing couture dresses and specializes in women's dresses, is a key hire for Dickson's executive team. He helps fill in the gaps when it comes to design and clothing, which are areas in which Dickson lacks experience, as he spent most of his career at a toy company. She will also play a key role in reigniting cultural relevance throughout Gap, Dickson said.

“His creative expertise and clarity on culture have constantly evolved American fashion, making him an excellent fit for the company as we look to energize our culture of creativity and revitalize these historic brands,” he said. Dickson. “His role as creative director at Old Navy is to really harmonize, orchestrate and enhance storytelling across product and marketing.”

Prior to Posen's appointment, Dickson hired Eric Chan, former CFO of the LA Clippers, to be Gap's chief strategy and business officer. He also hired his former colleague Amy Thompson, Mattel's former chief people officer, to take on the same role at Gap.

On the back end, Gap has made improvements in growing its gross margin and streamlining its cost structure, but has been grappling with a sharp decline in sales across all four of its brands: its namesake brand, Old Navy, Athleta and Banana Republic.

Gap and Old Navy have seen some signs of progress, but Athleta and Banana Republic have been dragging down business overall.

When it comes to Banana, Dickson told CNBC that he's “encouraged by the brand's aesthetic direction,” but said it will take time to regain its momentum.

“We have to be really strong to fix the fundamentals and strengthen them to generate more consistent results,” Dickson said. “And that's what we're really going to focus on, in our daily execution, based on the knowledge that we're learning.”

Athleta is still in a state of recovery after numerous leadership changes and a series of mistakes in designing the right type of product in the right styles and colors. She has also failed in her stores and in her marketing, Dickson said.

In August, Athleta named former Alo Yoga president Chris Blakeslee its next CEO, and Dickson said the brand has come a long way since he arrived.

“We're starting the year with a much cleaner palette and have seen early success in these full-priced newcomers and are encouraged by the consumer reaction,” Dickson said. “I really like where the team is going. We have a new delivery strategy, which they have been testing, there are new innovations, color has started to enter the stores and it has reacted very well.”

Here's a closer look at each brand's performance during the fourth quarter:

• Ancient Navy: Sales rose 6% to $2.29 billion, while comparable sales rose 2%, above estimates for a 1% increase, according to StreetAccount.
• Gap: Sales fell 5% to $1.01 billion, weighed down by the sale of the brand's business in China, while comparable sales rose 4%, well above estimates for a 1.3% decline, according to StreetAccount. The brand saw strength in the women's category.
• Banana Rebublic: Sales fell 2% to $567 million, down 2%, while comparable sales fell 4%, better than the 6.7% drop analysts were expecting, according to StreetAccount. The company noted that Banana has made progress in “elevating its aesthetic,” but reestablishing the brand “will take time and there is work to be done to better execute many of the fundamentals.”
• Athlete: Sales fell 4% to $419 million, while comparable sales fell a steep 10%. Gap noted that Athleta's performance improved compared to the previous quarter, but said sales are sluggish as the brand seeks to maintain its price level and overcome a previous period of high markdowns.

Correction: This story has been updated to correct the spelling of fashion designer Zac Posen's name.