Gap says it’s ready to compete. That’s the latest from Richard Dickson, Gap’s newest president and chief executive officer, who held the retailer’s latest quarterly earnings call on Thursday (Nov. 16).
According to Dickson, Gap has not only successfully shifted to a more profitable model but has streamlined its retail presence by closing multiple stores and has embraced a capital-light international franchise model in partnership with both the Chinese and European markets.
While that may sound positive, Dickson is acutely aware that much work still needs to be done. In fact, during the call with analysts, he explicitly noted that despite Gap’s past as a pop culture brand, it has fallen behind in essential trends and maintaining rigorous inventory management.
Despite these challenges, the third-quarter results showcase indications of renewed vigor in the brand’s core. The initiatives focus on strengthening the brand’s identity, selecting product assortments in line with current trends, and enhancing in-store merchandising presentations.
In light of this, Dickson underscored the importance of an enriched storytelling element in Gap’s online experience, accentuating a more unified and imaginative marketing narrative. This endeavor aims to engage in cultural dialogues, illustrating the brand’s commitment to revitalizing Gap across various touchpoints and returning to its origins as a “pop culture brand.”
As part of its initiatives, Gap collaborated with Mattel, showcasing Barbie on various items such as tees, skirts, logo hoodies, denim, button-downs, accessories, and even pet apparel. The collection was released on May 23, and additional Gap x Mattel collections are anticipated to debut throughout 2023.
Concerning inventory, Gap’s Chief Financial Officer Katrina O’Connell underscored a disciplined approach, aiming for a 15% reduction by year end, equivalent to a 6% decrease compared to 2019 levels.
This targeted inventory strategy is designed to strengthen gross margins by minimizing promotions and enhancing adaptability to consumer trends. As a result, O’Connell anticipates that upholding this disciplined inventory approach will enhance the brand’s agility in meeting market demands and heighten its overall relevance.
“Gap Inc. delivered a solid performance in the third quarter. We were pleased to see market share gains as well as improvements in both gross margins and operating margins, demonstrating our ability to drive operating and financial discipline. This rigor has put the company on stronger financial footing and is enabling us to focus on reinvigorating our portfolio of brands, strengthening our operating platform, and reviving our culture for success,” Dickson said in a statement.
Gap reported net sales of $3.8 billion, down 7% from the previous year, with a 2% decrease in comparable sales. Store sales declined by 6%, and online sales decreased by 8%, representing 38% of total net sales.
The gross margin was 41.3%, up 390 basis points from the previous year, driven by increased merchandise margin and decreased rent, occupancy and depreciation. Reported operating income was $250 million, with an operating margin of 6.6%.
Adjusted operating income, excluding $5 million in restructuring costs, was $255 million, with an adjusted operating margin of 6.8%. The effective tax rate was 13% and reported net income was $218 million, or $0.58 per diluted earnings per share. Adjusted net income, excluding restructuring costs, was $221 million, with adjusted diluted earnings per share of $0.59.