Gap Inc. Turns a Profit Despite Sales Declines in Q2

Gap Inc. reported a profitable second quarter, despite single- and double-digit sales declines across its portfolio of brands.

The San Francisco-based conglomerate reported net income of $117 million, or about $0.32 diluted earnings per share, for the quarter ending July 29. For the same quarter last year, the retailer reported a loss of $49 million.

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In a statement, the company credited “modest market share gains,” as well as a “significantly improved inventory position.”

Reported gross margin was 37.6 percent, a 310-point increase. Merchandise margin grew 410 basis points. Gap closed out the quarter with cash and cash equivalents totaling $1.4 billion, and ending inventory shrunk 29 percent to $2.23 billion.

The company still reported net sales declines across its stable of brands. That includes Old Navy, down 6 percent to $1.96 billion; Gap, down 14 percent to $755 million; Banana Republic, down 11 percent to $480 million; and Athleta, down 1 percent to $341 million.

Total net sales came in at $3.55 billion, an 8 percent drop. That was in line with the company’s guidance last quarter, as reported. For the third quarter, the company anticipates low-double-digit decreases. For fiscal 2023, it expects midsingle-digit declines.

Store sales — 3,453 locations in 40 countries — saw sales fall 4 percent. Online sales, which comprised 37 percent of total net sales, fell 9 percent.

The financial results come just days after the company’s new president and chief executive officer Richard Dickson assumed his role. On a conference call with investors and analysts, Dickson noted his imperative of “streamlining operations so that we can focus on growth-driving initiatives.”

Among that includes injecting creativity to each of the brands under Gap Inc. “There are a lot of parallels between my time at Mattel and Gap’s businesses on many levels,” he said. “Great assets, great talent, a moment where, to some extent a lot of self-inflicted challenges, some within our control and some ultimately impacting our business, and ultimately a phase that we are going to go through by reigniting a creative culture.”

Katrina O’Connell, executive vice president and chief financial officer, also noted that strength in the women’s business drove share gains. It anticipates losses due to macroeconomic headwinds, and although inflation didn’t hamper spend as much as expected, student loan repayments will impact spend at Old Navy.

“We’re seeing green shoots,” she said. “But the consumer pressure is most acute at Old Navy, and that’s the piece we all remain conscious on.”

Though the promotional environment didn’t reach a fever pitch, O’Connell said the company is also bracing for the impact on lower-spend shoppers. “We did see successful expansion of gross margins with lower promotional levels in the second quarter,” she said. “We saw about 200 points of margin expansion coming from lower promotional activity in the second quarter… we’ll aspire to do better with lower inventory levels, but we remain conscious of the consumer and want to make sure we’re adding value.”

Although Gap saw the steepest declines, that was also due to the sale of Gap China and the shuttering of Yeezy Gap. Excluding those, net sales were only down 1 percent, due to both strength in women’s and tepid sales in active and kid’s. The brand’s strategy of “partnering with buzzy and relevant brands,” most recently LoveShackFancy, has also reaped rewards, according to O’Connell.

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