Gap’s Old Navy Returns to Growth, Beats Wall Street Expectations in Holiday Quarter
Gap Inc.’s largest banner, Old Navy, has made a remarkable comeback, returning to growth for the first time in over a year during its holiday quarter. The retailer’s earnings report, released on Thursday, exceeded Wall Street’s expectations by a wide margin. Sales at Old Navy grew by 6% to $2.29 billion, contributing to Gap’s overall gross margin surge of 5.3 percentage points to 38.9%. This impressive performance was attributed to fewer markdowns and lower input costs. Analysts had predicted a gross margin of 36%.
The news of Old Navy’s resurgence sent shares of Gap soaring by about 5% in extended trading. The company’s reported net income for the three-month period that ended on February 3 was $185 million, or 49 cents per share, compared to a loss of $273 million, or 75 cents per share, in the previous year. Sales rose slightly to $4.3 billion, up approximately 1% from $4.24 billion a year earlier. It is worth noting that Gap, like other retailers, benefited from a 53rd week during fiscal 2023. Without this additional week, sales would have declined during the quarter. The extra week contributed about four percentage points of growth.
While Old Navy’s sales showed promising growth, Gap’s overall performance was mixed. Comparable sales during the quarter remained flat, which was better than the estimated decline of 1.1%. In-store sales increased by 4%, but online sales decreased by 2%, representing 40% of total revenue. Gap managed to reduce its inventory by 16% during fiscal year 2023 and is now focused on minimizing promotions and driving full price selling.
CEO Richard Dickson expressed his enthusiasm for the company’s progress, stating, “We were the authorities of taking on-trend basics, expressing it in ways that drove cultural conversations. At its best, we were a pop culture brand that did much more than sell clothes, and as you know, we all know, we lost our edge. We devolved from a pop culture brand to a clothing retailer, and today we’re moving again. We’re getting our vibe back.”
Gap’s recent success can be attributed to its turnaround strategy, which has been implemented under Dickson’s leadership. Heading into the holiday season, Gap had expressed caution due to an uncertain consumer environment. However, the company managed to surpass expectations. Looking ahead, Gap expects sales in the current quarter to remain roughly flat, compared to estimates of a 0.2% decline. For the full year, sales are also projected to be roughly flat on a 52-week basis.
Dickson acknowledged the challenges faced by the apparel market but remained optimistic about Gap’s prospects. He stated, “While the apparel market is currently expected to decline in 2024, there are always winners in every market, and we’re seeing the consumer react to newness. We’re seeing innovative marketing drive traffic, and it’s inspiring us to believe that we are on the right track with our reinvigoration playbook.”
To revitalize its legacy brands and drive growth, Gap has made strategic hires. Fashion designer Zac Posen was appointed as Old Navy’s chief creative officer and Gap’s creative director. Posen’s expertise in design and apparel is expected to bring fresh perspectives and cultural relevance to the brands. Additionally, Eric Chan, former CFO of the LA Clippers, joined as Gap’s chief business and strategy officer, while Amy Thompson, former chief people officer at Mattel, assumed the same role at Gap.
Gap’s other brands, Banana Republic and Athleta, have faced challenges in recent years. Banana Republic saw a decline in sales of 2%, but Dickson expressed optimism about the brand’s aesthetic direction. He acknowledged the need to strengthen the fundamentals to drive consistent results. Athleta, on the other hand, experienced a 4% decline in sales and a steep 10% decline in comparable sales. However, Dickson highlighted the brand’s progress in terms of new arrivals and consumer reaction.
Overall, Gap’s strong performance, particularly with Old Navy’s return to growth, has positioned the company for a successful year ahead. With a focus on innovation, marketing, and strengthening its brands, Gap aims to navigate the challenges of the apparel market and emerge as a winner. As Dickson aptly summarized, “We’re getting our vibe back.”