Gap Inc. on Thursday it narrowed its year-over-year profit orientation as it reported a decline in first-quarter tax sales, which were dragged down by its Old Navy business.
Shares fell more than 10% after hours, after closing the day at 4%.
An unbalanced mix of clothing sizes, ongoing inventory delays, and an increase in price reduction promotions affected Old Navy’s performance during the quarter.
The lowest-income consumer, who is the target customer of Old Navy, is beginning to feel affected by inflation, CEO Sonia Syngal told CNBC. Shoppers have also quickly moved from buying active clothing and fleece sweatshirts, the “sweet spot” of the Old Navy, to looking for party dresses and office clothes, he said in a telephone interview.
“We’re dealing with really volatile consumer signals, either last year at Covid or this year’s post-Covid behaviors,” Syngal said. “Over time, we will see that customer preference for product types will be balanced.”
Gap’s findings point to a larger divergence in the retail industry between companies that serve Americans with a lot of cash in their portfolio and those that sell to buyers who are aware of the costs of looking for deals.
As inflation heats up, the latter have been the hardest hit and have already begun to cut certain purchases. Meanwhile, wealthier consumers continue to dump expensive summer vacation clothes, jewelry and luggage at stores like Nordstrom, Bloomingdale’s and Ralph Lauren.
In late April, Gap had warned of obstacles within the Old Navy business when it announced the departure of the unit’s chief executive, Nancy Green. Syngal has been helping lead the discount clothing brand as the company looks for a successor to Green.
For fiscal year 2022, Gap now expects to earn between 30 and 60 cents per share, on a tight basis. This is below a previous range of $ 1.85 and $ 2.05. And well below analysts ’expectations of $ 1.34 per share, according to Refinitiv data.
Chief Financial Officer Katrina O’Connell said Gap reviewed its outlook to take into account the “implementation challenges” in the Old Navy, an uncertain macroeconomic environment and inflationary cost pressures. In addition, a slowdown in China that is hurting the eponymous Gap brand.
Gap ranged toward a net loss in the three-month period ended April 30 of $ 162 million, or 44 cents per share, compared to a net income of $ 166 million, or a gain of 43 cents. per share, one year before.
Revenue fell about 13 percent to $ 3.48 billion from $ 3.99 billion a year earlier. That was slightly ahead of expectations of $ 3.46 billion.
Gap said its sales figure was affected by an estimated 5 percentage points related to the retailer’s increase a year ago in stimulus controls, in addition to about 3 percentage points for divestments, store closures and the transition from its European business to a partnership model.
In general, sales in the same stores fell by 14% over the previous year, more than the 12.2% drop that analysts had been looking for. Within that figure, Gap said its online sales were down 17% and in-store sales were down 10% from last year.
The following is a breakdown of in-store sales performance by brand:
- Gap: Down 11% year-on-year
- Old Navy: Decrease of 22% year after year
- Banana Republic: a 27% year-over-year increase
- Athleta: 7% drop
Gap executives also acknowledged Thursday that a recent push to sell more larger-sized items to Old Navy meant the retailer did not have enough of the basic sizes for customers and too many of the extended sizes that were not being purchased. .
“Our retrospective view is that perhaps with the launch of inclusive size, we had really moved away from messaging, the core of what works for Old Navy, which is that valuable message,” CFO O’Connell told CNBC on a Phone Call “We’re really trying to get back to it.”
Gap’s total stocks on April 30 were up 34% from the previous year.
Those levels will start to drop year-round, O’Connell said, but could remain high during the second quarter.
“Our inventory levels were significantly higher than we expected,” O’Connell said, adding that nearly half of the unwanted increase was due to prolonged traffic times that he hopes will not improve any time soon.
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