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Gap (GPS) reports Q1 2022 earnings

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Gap Inc. on Thursday slashed its profit guidance for the total yr because it reported a decline in fiscal first-quarter sales, which were dragged down by its Old Navy business.

An imbalanced mixture of clothing sizes, ongoing inventory delays and an uptick in price-lowering promotions put a dent in Old Navy’s performance in the course of the quarter.

The lower-income consumer, which is Old Navy’s goal customer, is beginning to feel pinched by inflation, Chief Executive Officer Sonia Syngal told CNBC. Shoppers even have quickly shifted from buying up lively clothes and fleece hoodies — Old Navy’s “sweet spot” — to searching for party dresses and office clothes, she said in a phone interview.

“We’re coping with really volatile consumer signals — whether it was last yr in Covid, or this yr’s post-Covid behaviors,” said Syngal. “Over time, we’ll see customer preference for product types balanced out.”

Gap shares fell nearly 20% in prolonged trading.

The outcomes from Gap signal a much bigger divergence that’s shaping up within the retail industry between those corporations that cater to Americans with loads of money of their wallets and people who sell to cost-conscious shoppers who’re looking for out deals.

As inflation heats up, the latter have been hit the toughest and have already began to curtail certain purchases. Meantime, the wealthiest consumers proceed to splurge on expensive outfits, jewelry and luggage for summer vacations at stores including Nordstrom, Bloomingdale’s and Ralph Lauren.

In late April, Gap had warned of obstacles inside the Old Navy business when it announced the departure of the unit’s chief executive officer, Nancy Green. Syngal has been helping to guide the discount apparel brand within the interim, as the corporate looks for a successor to Green.

For the fiscal yr 2022, Gap now expects to earn between 30 cents and 60 cents per share, on an adjusted basis. That is down from a previous range of 1.85 and $2.05. And well below analysts’ expectations for $1.34 per share, based on Refinitiv data.

Chief Financial Officer Katrina O’Connell said that Gap revised its outlook to account for the “executional challenges” at Old Navy, an uncertain macroeconomic environment and inflationary cost pressures. Plus, a slowdown in China that’s hurting Gap’s namesake brand.

Gap swung to a net loss within the three-month period ended April 30 of $162 million, or 44 cents per share, compared with net income of $166 million, or earnings of 43 cents a share, a yr earlier.

Revenue fell roughly 13% to $3.48 billion from $3.99 billion a yr earlier. That got here in barely ahead of expectations for $3.46 billion.

Gap said its sales figure was hit by an estimated 5 percentage points related to the retailer lapping a year-ago lift from stimulus checks, along with roughly 3 percentage points from divestitures, store closures and transitioning its European business to a partnership model.

Overall, same-store sales fell 14% from the prior yr, greater than the 12.2% drop that analysts had been searching for. Inside that figure, Gap said its online sales declined 17% and in-store sales dropped 10% versus last yr.

Here’s a breakdown of same-store sales performance, by brand:

  • Gap: Down 11% yr over yr
  • Old Navy: Down 22% yr over yr
  • Banana Republic: up 27% yr over yr
  • Athleta: down 7%

Gap’s executives also acknowledged Thursday that a recent push to sell more plus-size items at Old Navy resulted within the retailer not carrying enough of its core sizes for patrons, and an excessive amount of of the prolonged sizes that weren’t being purchased.

“Our hindsight is that perhaps with the inclusive sizing launch, we had gotten away from really messaging, the core of what works for Old Navy, which is that value messaging,” CFO O’Connell told CNBC in a phone call. “We actually are attempting to return to that.”

Gap’s total inventories as of April 30 were up 34% compared with the prior yr.

Those levels will start to return down all year long, O’Connell said, but could remain elevated within the second quarter.

“Our inventory levels were significantly higher than we had hoped,” O’Connell said, adding that almost half of the unwanted increase was on account of prolonged transit times that she expects aren’t convalescing anytime soon.

Also on Thursday, American Eagle cut its annual operating profit forecast after missing analysts’ quarterly expectations. Its shares fell around 12%.

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