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Gap (GPS) earnings Q3 2022

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Holiday shoppers participate in early Black Friday shopping deals on the Gap store in Times Square in Latest York.

Brendan McDermid | Reuters

Gap on Thursday beat Wall Street’s quarterly revenue expectations, but gave a cautious outlook for the vacation season.

The apparel retailer — which incorporates its namesake brand, Old Navy, Banana Republic and Athleta — said it anticipates its overall net sales could possibly be down mid-single digits year-over-year within the fourth quarter of fiscal 2022.

Chief Financial Officer Katrina O’Connell said in a news release while the corporate made progress in reducing its bloated inventory, it’s going to “proceed to take a prudent approach in light of the uncertain consumer and increasingly promotional environment as we glance to the rest of fiscal 2022.”

Shares of the corporate were up roughly 8% in prolonged trading Thursday. The stock has fallen 27% to date this yr and closed on Thursday at $12.72, up greater than 5% throughout the session.

Here’s how the retailer performed throughout the three-month period ended Oct. 29:

  • Earnings per share: 71 cents adjusted
  • Revenue: $4.04 billion vs. $3.8 billion expected, in line with Refinitiv consensus estimates.

Wall Street was expecting Gap to interrupt even on a per-share basis, but it surely wasn’t clear if reported earnings per share were comparable to estimates.

Gap’s net income rose to $282 million, or 77 cents per share unadjusted, a dramatic improvement from a net lack of $152 million, or 40 cents per share, within the year-ago period. Revenue rose 2% to $4.04 billion from $3.94 billion throughout the same quarter in 2021.

In August, Gap withdrew its full-year guidance, citing company-specific struggles together with high inflation and lower consumer sentiment.

The corporate is on the lookout for a latest CEO after Sonia Syngal departed this summer and playing out a high-profile breakup with Ye’s Yeezy brand. Ye, formerly Kanye West, terminated his contract with Gap in September citing what he called contract breaches and an absence of creative control. Gap removed all Yeezy products from its stores in late October, after West made public antisemitic remarks.

Gap said Thursday it incurred $53 million in impairment charges related to Yeezy Gap.

Comparable sales

The overall business’ comparable sales, which track revenue online and at stores open for at the least 12 months, rose 1% compared with the year-ago period. Analysts had expected a decline in comparable sales of three.2%, in line with StreetAccount estimates.

Online sales rose 5% over last yr and represented 39% of total net sales.

Here’s a more in-depth take a look at each division:

  • Gap’s namesake brand, known for denim and basics: comparable sales increased 4% globally and were flat in North America. The corporate said it got in higher shape with inventory, but had weaker sales in the youngsters and baby categories.
  • Old Navy, known for casual clothing for adults and youngsters: comparable sales fell 1%. The brand saw softer demand for baby and youngsters’ clothing and got hurt by low-income consumers feeling stretched by inflation.
  • Banana Republic, generally known as a destination for suiting and dresses: comparable sales rose 10%. It’s on the lookout for latest direction after the pandemic disrupted the everyday fashion routine – causing more people to earn a living from home a couple of days every week and dress more casually on the times they head into the office.
  • Athleta, an activewear brand: comparable sales were flat, as shoppers shifted to purchasing more outfits for occasions and for work. The business is lapping a time when Americans eagerly stocked up on stretchy leggings, workout tops and other comfortable loungewear when spending time at home. 

The retailer can be shaking up its store footprint, based on the banners which are growing or shrinking. To date this yr, the corporate has closed a complete of 29 Gap and Banana Republic stores in North America, O’Connell said on a call with investors. It now expects to shut about 30 additional stores this yr, as a part of a goal to shut 350 stores in North America by the tip of fiscal 2023.

She said the corporate is on target to open a complete of 30 Athleta stores and now plans to open 10 Old Navy stores by the tip of this fiscal yr.

Inventory improvements

The retailer has been coping with a glut of apparel that is out of season, out of favor or the improper size.

Bloated inventory has develop into an issue for a lot of retailers, including Gap. A yr ago, Gap struggled to maintain up with demand, as factories shut temporarily due to Covid and goods got stuck in congested ports. The retailer went so far as paying extra to fly in apparel by air freight. But delays and backlogs meant some seasonal merchandise still arrived too late.

Inventory has piled up in recent quarters as consumers seek dressier clothes as an alternative of casualwear. Gap’s inventories were up 34% in the primary quarter and 37% within the second quarter. Gap been forced to supply deep markdowns, cutting into profits.

At the tip of the third-quarter inventories were up 12% as the corporate continued to pack and hold merchandise to sell one other time. The corporate also saw higher levels of slow-turning basics and a few leftover seasonal products, O’Connell said.

She said the corporate is “committed to getting our inventories cleaned up in order that we do not proceed to hold the surplus inventory into next yr.”

Old Navy has faced a more specific inventory issue: The division decided to supply more plus-sized women’s apparel, however the move wound up leaving stores with too many prolonged sizes and never enough of popular sizes. Gap said Thursday that Old Navy made strides within the third quarter to enhance its balance of sizes, which drove sales.

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