Gap beats earnings and revenue estimates, hikes profit margin outlook as results are posted early

Gap raised its full-year profit outlook on Thursday after seeing better-than-expected results at its largest brand, Old Navy.

The apparel company’s fiscal second quarter results were released earlier than planned after the company “inadvertently” posted them to its website and then removed them, a Gap spokesperson told CNBC.

“As soon as the error was caught, we notified the NYSE and trading of our stock was halted temporarily,” the spokesperson said, adding the results were posted “as a result of administrative error.”

Gap’s stock was halted just before 10 a.m. ET. The company then released its quarterly results at 11:12 a.m. ET. Following the release, shares rose more than 2% after being halted for much of the morning.

Here’s what the company reported, compared with what Wall Street expected, according to analysts surveyed by LSEG:

• Earnings per share: 54 cents vs. 40 cents expected
• Revenue: $3.72 billion vs. $3.63 billion expected

The company’s reported net income for the three-month period that ended Aug. 3 nearly doubled from the year-ago period. Gap posted earnings of $206 million, or 54 cents per share, compared with $117 million, or 32 cents per share, a year earlier.

Sales rose to $3.72 billion, up about 5% from $3.55 billion in the prior-year period.

For the full year, Gap now expects its gross margin to be 2 percentage points higher than the uptick of at least 1.5 percentage points it had previously forecast. It also expects its operating income to grow by about 50%. It previously anticipated it would increase by slightly more than 40%.

Over the last year, Gap has been working to turn around its business, reverse a sales slump and reclaim cultural relevance under the direction of CEO Richard Dickson — the former Mattel executive credited with reviving the Barbie empire.

Since Dickson took over, sales have started to turn around at the company’s four brands — Banana Republic, Old Navy, Athleta and its namesake banner — and the company is finding its voice again among its peers. Beyond sales and relevance, Gap’s profits and balance sheet have also improved significantly under Dickson. The company ended the quarter with $2.1 billion in cash, cash equivalents and short-term investments, an increase of 59% compared to last year.

The company’s second-quarter results didn’t blow away expectations, but are solid improvements from where the company was a year ago.

“We really concentrated on our strategic priorities, and the first priority has been about maintaining financial and operational rigor that is becoming, to the extent that we can define it, the fabric of how we work, and it’s reinforcing better processes and cultural accountability,” Dickson told CNBC in an interview.

“Reinvigorating our brands is enabled by financial and operational rigor, and you see it. You see it in the results, you see it in our stores. You see it on our sites,” he added.

“We’re building stronger brand identities. They’re supported by trend right products,” Dickson said. “We’re amplifying those through better storytelling. Our media mix has gotten much more innovative, and generally speaking, I’m proud of the brand’s portfolio work in the context of cultural relevance.”

During the quarter, comparable sales were up 3%, in line with the 3.1% growth that analysts had expected, according to StreetAccount. Its gross margin came in better than forecast at 42.6%, ahead of the 40.8% that analysts had expected, according to StreetAccount.

Here’s a closer look at how each brand performed:

Sales rose 8% to $2.1 billion, with comparable sales up 5%, better than the 4.3% growth analysts had expected, according to StreetAccount. The company has been working to improve its assortment and ensure that its value offering isn’t just low cost but also fashionable.

“We’ve been dialing up, if you will, our fashion quotient,” said Dickson. “Besides really driving a much more disciplined approach with financial and operational rigor, we’re now dialing up and seeing the results of our reinvigoration strategy.”

As consumers feel the brunt of inflation and high interest rates, many have traded down to cheaper options, and Dickson said Old Navy is seeing “growth across all income cohorts.”

“With a presumed flight to value, Old Navy is there with a welcome mat,” said Dickson. “We become the style authority and the brand in the value space, and so again, we’re concentrating on our strategic approach, our strategic priorities. I think we’re seeing the success of that.”

Revenue at Gap’s namesake banner rose 1% to $766 million during the quarter, with comparable sales up 3%, just shy of the 3.4% uptick analysts had expected. As Dickson looks to bring cultural relevancy back to the company, it has helped the company’s namesake banner grow sales, he said.

Gap’s elevated work-wear line has dragged on the company’s overall performance. Both revenue and comparable sales were flat in the second quarter compared to last year, versus StreetAccount estimates of up 0.5%. The company said it is working to “improve its pricing and assortment” to turn around the brand’s performance.

“In some cases, we got too ahead of ourselves, and in other cases, we could add more value orientation to drive more scale,” Dickson said when asked what work the company is doing to improve pricing.

“Some of our new merchandising strategies include depth of product in store, finding that right mix, if you will. And last but not least, really improving fit, which is an important part of any brand, but in particular, has been a challenge in the women’s space in Banana Republic, where we’re really concentrating,” he said.

Sales at Gap’s athleisure brand Athleta slid 1% to $388 million, with comparable sales down 4%. The results were not comparable to analyst estimates.

One of Gap’s strongest brands during the pandemic, Athleta had been on a downward trajectory and weighed heavily on the company’s performance until it appointed former Alo Yoga president Chris Blakeslee as its CEO last summer. Since then, Blakeslee has worked to improve Athleta’s assortment and has also worked to generate more excitement at the line with product drops and collaborations with athletes.

In a press release, the company said it expects Athleta to return to positive comparable sales growth for the remainder of the year.