Gap Inc. losses shrink in Q1 as sales continue to slide

Dive Brief:

Gap Inc. on Thursday said Q1 net sales slid 6% year over year to $3.3 billion, with comps down 3%. Store sales fell 4%, while online sales, which were 37% of total sales, fell 9%. Net loss narrowed to $18 million, from last year’s $162 million net loss.
Net sales at all brands declined. Old Navy fell 1% to $1.8 billion, with comps down 1%. Gap fell 13% to $692 million, with comps up 1%. Banana Republic fell 10% to $432 million, with comps down 8%. Due to "continued product acceptance challenges,” Athleta fell 11% to $321 million, with comps down 13%.
The company continues to be led by an interim CEO, and Athleta is also still looking for a new brand chief after Mary Beth Laughton’s departure earlier this year.

Dive Insight:

Gap Inc., which has been focused on slashing expenses and shrinking what interim CEO Bob Martin has described as a bloated management structure, was able to cut its losses in the first quarter.

Last month the company said it would cut 1,800 jobs, after cutting 500 in September. Martin, who also chairs the board, said the shakeup is leading to a more agile and creative operation.

While executives on Thursday described some new momentum in merchandising at the company’s Old Navy and Gap brands, sales fell across the portfolio. Athleta has been touted as a growth driver for the apparel conglomerate, but the brand's merchandise isn't connecting with customers.

“We have moved quickly and effectively at clearing excess inventory, improving assortment particularly at Old Navy and Gap, resulting in share gains in both women’s and baby in Q1,” Martin told analysts. Adjusted operating margins expanded by 600 basis points compared to last year, thanks to “significantly improved gross margin, from the reduction of excessive air freight expense and improved promotional activity, as well as adjusted SG&A leverage. And our balance sheet is stronger.”

GlobalData Managing Director Neil Saunders acknowledged the new strength in the bottom line, but said little progress is being made in merchandising. Over two years, Old Navy has lost market share, in part because its lower-income customers are particularly hard hit by inflation and other economic challenges, but also because of “lackluster merchandise in menswear and kidswear,” he said in emailed comments. Recent gains at Banana Republic hit reverse in Q1, and Athleta is missing out on continued growth in athleisure due to its “poor range,” he said.

At namesake Gap, the “assortment is reasonable but lacks the pizazz to justify the higher price points in a market that has become very cost focused,” Saunders said. “There is just no excitement or energy surrounding the label, which does the company no favors in an environment where consumers are more reluctant to buy.”

The company must attend to the top line as well as the bottom line, according to Saunders.

“This requires a lot more effort and a clear and compelling strategy, both of which are absent,” he warned.

“Our general sense is that as a hurricane of disruption rages around it, blowing away chunks of market share, Gap sits idly by hoping that all will be well,” he said. “Despite management’s warm words about lasting change permeating the organization, we see very little tangible proof of fundamental adaptation.”