Gap shares tumble as earnings fall short, retailer 'remains optimistic' about the holidays

Key Points
  • Gap's fiscal third-quarter earnings fell short of estimates, despite sales gains at Old Navy and Athleta.
  • The apparel retailer has been spending more on marketing in a bid to define its core brands and grow market share.
  • Gap said it "remains optimistic" about the holiday quarter, citing the strength of the American consumer.

In this article

A Gap store in New York, August 2, 2020.
Scott Mlyn | CNBC

Gap Inc. shares fell Tuesday after the company reported fiscal third-quarter earnings that fell short of expectations, as higher spending on marketing offset sales gains at Old Navy and Athleta, while the company's namesake and Banana Republic brands reported double-digit declines.

Under CEO Sonia Syngal, the retailer has centered investments around new advertising to clearly define each of its core brands. The effort kicked off with recent holiday-themed commercials, in a bid to gain market share in key categories such as women's workout apparel and denim.

While the global health crisis has made it difficult for many companies to offer a future outlook, Gap said it "remains optimistic" about the future. It expects fourth-quarter sales to be about equal to or slightly higher than a year ago. Analysts had been calling for a decline of 2.8%.

"Fundamentally it seems like the consumer is relatively strong," CFO Katrina O'Connell said in an interview. "Because the consumer can't spend on entertainment [and] travel, they're looking for a place to spend their discretionary dollars. And we believe that they will be using those dollars to provide more compelling gifts to their families over the holiday season as a way to show their love and affection during these tough times."

The company cautioned, however, that a rising number of Covid cases around the world could still negatively impact sales and traffic in stores. Retailers including Abercrombie & Fitch and Macy's have cited a similar challenge in recent days, as the threat of additional, temporary store closures due to the pandemic looms.

Shares fell more than 10% in after-hours trading, having risen more than 51% since the start of this year. Gap has a market cap of $10 billion.

Here's how the retailer did during its fiscal third quarter, compared with what analysts were expecting, based on Refinitiv data:

  • Earnings per share: 25 cents vs. 32 cents, expected
  • Revenue: $3.99 billion vs. $3.82 billion, expected
  • Same-store sales: Up 5% vs. a decline of 0.3%, expected by StreetAccount

Gap Inc.'s same-store sales during the latest quarter grew 5%, with Athleta reporting a record quarterly increase. That came in far better than the 0.3% decline that analysts were expecting.

The company is still working to turn around its Gap and Banana Republic divisions, however, and has named a new chief, who has experience with consumer goods, to lead the latter.

"Gap's boring and mundane offer provides so little in the way of excitement that it is very easy for consumers to overlook," GlobalData Retail Managing Director Neil Saunders said in a statement. "The problems of a dull brand image, a lack of clarity about who the customer is, and a constant cycle of discounting all remain fundamental issues that need to be resolved sooner rather than later."

Gap also on Tuesday named Asheesh Saksena, most recently president of Best Buy's health division, to a newly created position of chief growth officer, effective in January.

Online sales surge

For the quarter ended Oct. 31, Gap earned $95 million, or 25 cents per share, compared with $140 million, or 37 cents a share, a year earlier. That came in short of expectations for earnings of 32 cents per share.

Sales for the period were about flat with the prior year at $3.99 billion and outpaced expectations for $3.82 billion.

The 5% gain in same-store sales, which track sales online and at stores open for at least 12 months, were boosted in large part by the company's digital business, which surged 61% and accounted for 40% of total sales during the quarter. Gap said it added more than 3.4 million new customers online. And it reiterated plans to derive half of its sales from the web by 2023.

Gap said the net sales volume for orders delivered to customers through either curbside pickup or its buy online, pick up in store offering climbed 56% from last year. Many companies have been touting and pushing these options during the pandemic as a way to best use their stores, while cutting back on shipping expenses and limiting contact with consumers.

Within Old Navy, net sales increased 15%, and same-store sales were up 17%. The company said it offered 55% more activewear under the Old Navy brand during the quarter, to meet the needs of customers looking for comfortable clothing as they spend more time at home.

Gap taps Stangl to head Banana Republic

At Gap's namesake banner, net sales fell 14%, and same-store sales dropped 5%. The company attributed the declines, in part, to store closures that took place during the quarter.

Gap Inc. has previously said it expects to close roughly 30% of its Gap and Banana Republic stores in North America by the end of fiscal 2023.

At Banana Republic, a brand known for its work apparel, net sales fell 34%, and same-store sales dropped 30%. The company said it has been trying to add more casual attire to this brand, to meet the preferences of women working at home during the pandemic. On Tuesday, Gap named former Williams-Sonoma and RH executive Sandra Stangl as the new president and CEO of Banana Republic, effective next month, as part of its bid to revive the brand.

"The team has been heads down, focused on changing the [Banana Republic] assortment to be more loungewear, more activewear, more comfortable clothing. But it takes a while to shift the assortment," O'Connell said.

Within Athleta, Gap's brand for women's workout clothes, net sales were up 35%, as same-store sales surged 37%, the highest ever recorded in the brand's history. The company also cited its mask business, sparked by the pandemic, as a contributing factor to attracting new customers to Athleta.

Read the full press release from Gap here.

Black Friday in the age of Covid
Black Friday in the age of Covid