The Gap Beats Earnings Estimates Amid Strong Digital Presence

The Gap

With a strong digital platform supporting its brands, The Gap, Inc. had slightly better-than-expected results for the third quarter. The retailer reported earnings per share of 69 cents and revenues of $4.1 billion compared to analysts’ estimates of 68 cents and $4 billion.

In an earnings conference call with analysts on Tuesday (November 20), Gap, Inc. President and CEO Art Peck noted that early feedback on the company’s newly-launched Hill City brand has been positive and customer engagement has been very strong. At the same time, Peck said that the retailer is capitalizing on the millions of visitors visiting its eCommerce platform to bring the brand before more people. He also noted that the brand came to life in a little more than a year with a team of under 20 people — a feat that Peck said would not be possible without The Gap platform and its customer base.

When it came to comp sales, however, the company’s Gap Global brand saw a negative 7 percent in comparable sales compared to a positive 1 percent last year. By contrast, Old Navy Global presented the same positive 4 percent growth that it did last year and Banana Republic Global presented positive 2 percent growth versus negative 1 percent last year. Addressing the results of the Gap Global brand, Peck said on the call that, “while the performance of Gap brand this quarter was not entirely surprising, clearly, we’re disappointed, and we need to do better.”

While the brand still continues to feel the impact of operational missteps in the business last year, Peck said, it also faces more fundamental issues. As the company said on its last call, the company made the decision to right-size the product assortment by reducing its stock-keeping unit (SKU) count by 30 percent. Peck also noted that the company named a new brand president in June, Neil Fiske, and his first priority has been to put the brand on an even keel. In terms of Fiske’s progress, Peck said, “he’s assessed the business, the organization and the underlying processes and is well into developing his plans.”

The biggest challenge for the Gap brand, Peck said, is largely a function of legacy elements such as real estate obligations that currently hold back the business. But, breaking the brand’s business into parts, Peck said that has a strong and growing online business that constitutes about 20 percent of the brand revenue. The company also has a profitable outlet business, which has roughly 500 stores around the world, that comprises about 30 percent of revenue. But the remainder is the specialty store business that is underperforming as of now, Peck said.

Overall, the company has 775 Gap-branded specialty stores around the world. On a cash basis, Peck said that the fleet returns a very modest contribution, and the spectrum of stores from best to worst stores is extremely wide. As a result, tackling the fleet’s bottom half could represent more than $100 million in earnings opportunities. “This is the piece of the business that we’re firmly committed to addressing with urgency,” Peck said, but he noted that the company has flagship stores around the world that it would look at with an objective lens to decide which locations are valuable enough to keep.

The Gap Inc.’s Bright Spots

In contrast to the Gap brand, Old Navy continued its profitable sales trajectory as it brought in 11 percent sales growth and 4 percent comp sales in the third quarter. Those results came despite the warmer-than-forecasted weather for much of the quarter, according to Peck, and nearly all divisions within the brand saw positive comps in the quarter even with those headwinds. He also noted that product margins continue to expand, which he said has been the case all year.

Even with those results, Peck noted that dresses and woven tops experienced some softness driven by fabrication and some of the choices of prints. But he said that the team recognized the problem and has largely corrected the issues for the fourth quarter and beyond. At the same time, however, Peck noted that store traffic at Old Navy continues to outpace industry trends and the company saw meaningful online sales acceleration during the quarter amid the approaching holiday.

Another Gap brand, Athleta, “remains a growth engine in the portfolio.” In the third quarter, Peck noted that 95 percent of the business comped positive. He also drew attention to the brand’s girls’ line, saying that had previously noted that the line would seriously play in the back-to-school space. The brand “did not disappoint,” Peck said, as it had an over 60 comp in that line. He also noted that the brand continues to see solid growth in its customer file and is on track to surpass its customer acquisition goals for 2018.