Old Navy Saves The Day for Gap Inc.

by Trefis Team
Gap Inc.
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The apparel retail industry has been plagued with soft mall traffic and reduced consumer spending, which has resulted in a spate of downsizing and bankruptcies. Gap Inc. (NYSE:GPS), being a part of this blighted sector, has been suffering as a result. However, in its first quarter earnings release, it reported an improvement in its earnings per share and a largely flat sales growth, both metrics which beat consensus estimates, bucking the trend of dismal results in the retail industry. Net sales, which came in at $3.44 billion, beat expectations by $50 million, while the earnings exceeded estimates by 7 cents per share. The relatively strong performance, given the company’s many periods of poor results, gives hope of a sustained improvement in the earnings for Gap. Old Navy continued with its solid showing in the quarter, and together with the strength in the athletic segment, which delivered double-digit comps, leaves the company well-positioned to capture greater market share.

Gap Inc. Q1 2017 Earnings-1

Improving Margins Boosts Bottom-Line

While Gap did not report a rise in sales, as compared to last year, it may not be such a bad thing when compared to the performance of the industry as a whole. Other companies have been battling a decline in sales amidst a tough retail environment. Furthermore, the company also noted a 2% rise in the same store sales, a metric which is used to compare the sales in the company’s stores that have been in operation for a year or more. As higher sales per store do not result in any increased operating expenses, growth in this metric is highly important as it would push the margins higher. It is one of the primary factors which resulted in improved margins for Gap in the quarter.

Gross margins were up 270 basis points to 37.9%, while merchandise margins were higher by 220 basis points, with positive AUR (Average Unit Retail) at all of the global brands. Lower rent and occupancy expenses also leveraged 50 basis points, as a result of the international store closures conducted last year.

Old Navy Drives Growth For Gap

Old Navy reported its fifth consecutive year of sales growth in 2016. While tough traffic trends existed during the first quarter, the company managed to overcome that with the help of a strong commercial plan, impressive marketing, and better product acceptance. The brand, being more pocket-friendly than Gap’s other brands, has been the one driving the company’s sales growth, and the company intends to continue investing in it and building that business. The brand’s positioning in the value-segment, with an off-mall presence, has resulted in incremental tailwinds.

However, the other two brands again delivered a negative comparable sales growth in the quarter. While a number of initiatives have been implemented by the company to turn around these two businesses, no positives are forthcoming as yet. While improvements are not expected to show over night, the soft retail environment will not make matters any easier, and it might just delay the improvement in the performance.

While the progress at Gap has been slower than expected, there have been some improvements in key places in the business. However, Banana Republic’s performance has been plaguing the company. Many consumers are not willing to pay the higher price points charged by the brand. Steps such as reducing the store count or even shuttering of the business may make more sense for the company.

Gap Inc. Q1 2017 Earnings-2

See our complete analysis for Gap Inc.

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1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Gap Inc.
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