Gap shares tumble on earnings miss as Old Navy growth slows

Key Points
  • Same-store sales at the Gap brand fell 4 percent, flat from a year ago.
  • Same-store sales at Old Navy were up only 3 percent, much less than an 8 percent jump during the same period in fiscal 2017.
  • Gap Inc. is still expecting to earn between $2.55 and $2.70 per share this year.
Sale signs are on display in the windows of a Gap retail location.
Scott Mlyn | CNBC

Gap Inc. on Thursday reported revenue that outpaced analysts' estimates for the first quarter, but its earnings fell short of expectations, thanks to a further slump of the namesake Gap brand and a more unexpected slowdown at Old Navy.

Shares were still falling more than 9 percent Friday morning on the news.

Same-store sales at Gap stores globally fell 4 percent during the first period, flat from a year ago. Banana Republic, meanwhile, saw the same key metric climb 3 percent against a 4 percent loss in the prior year.

While the Old Navy label saw same-store sales growth of 3 percent, that was much less than an 8 percent increase delivered a year ago. A slowdown of Gap's strongest division could spell trouble for the chain in the future if those numbers don't start to pick back up.

"Despite the pressures we faced in the first quarter, we are affirming our full-year guidance, reflecting our confidence in the underlying fundamentals of the business as well as the benefits of executing against our balanced growth strategy," Gap CFO Teri List-Stoll said in a statement.

Net income was $164 million, or 42 cents a share, in the period ended May 5, compared with $143 million, or 36 cents a share, a year ago. Excluding one-time items, the retailer earned 42 cents a share, 4 cents lower than what analysts were expecting, based on a survey by Thomson Reuters.

Total sales climbed to $3.8 billion from $3.4 billion a year ago, surpassing a forecast by analysts of $3.6 billion.

Overall same-store sales — a key metric used by analysts to monitor retailers — rose 1 percent, while the Street was expecting an increase of about 1.7 percent, according to a Thomson Reuters survey.

CEO Art Peck said the Gap brand had its "expected challenges" during the latest quarter. On a call with analysts and investors Thursday afternoon, he said Athleta continues to be an "underappreciated gem" in Gap Inc.'s portfolio.

The company earlier this year announced it would be opening 60 Old Navy stores by the end of 2018, as part of a multiyear expansion of the Old Navy and Athleta brands. Meanwhile, it's closing an unspecified number of Gap and Banana Republic stores. On Thursday, it said the openings and closings would net out to the addition of roughly 25 locations by the end of the fiscal year.

Peck has told CNBC that he's focused on moving into more open-air centers and street-level retail and away from malls.

Just earlier this month, Telsey Advisory Group upgraded Gap to outperform from market perform, citing "sequentially improving operating momentum, which ... speaks to the underlying health of the brand portfolio."

Gap Inc. is still expecting to earn between $2.55 and $2.70 per share in 2018.

Shares have climbed nearly 50 percent, to above $29 apiece, from a year ago. The retailer has a market capitalization of about $11.6 billion today.

WATCH: Gap misses on earnings

Gap misses on earnings
Gap misses on earnings