Dive Brief:
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Gap Inc. made progress across all brands in Q3, pushing net sales up 1.6% year over year to $3.8 billion and comps up 1%. Store sales fell 2%, while online sales rose 7% and were 40% of total net sales.
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By brand in the period: Old Navy net sales rose 1% to $2.2 billion, with comps flat; Gap net sales rose 1% to $899 million, with comps up 3%; Banana Republic net sales rose 2% to $469 million, with comps down 1%; and Athleta net sales rose 4% to $290 million, with comps up 5%.
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Gross margin expanded by 140 basis points to 42.7% as merchandise margin expanded by 90 basis points. Inventory was down 2%. Net income rose 25.7% to $274 million.
Dive Insight:
Based on its results in the third quarter, Gap Inc.’s turnaround appears to be on solid ground.
“While fears of an eventual break in the story continue to pop up, 3Q again showed us that the turnaround has legs,” Wells Fargo analyst led by Ike Boruchow said in emailed comments.
Each of its brands grabbed share in the period, CEO Richard Dickson told analysts during a conference call Thursday.
“That's actually the seventh consecutive quarter that we're posting market share gains for the company and against the backdrop of a challenged industry,” he said. “The apparel industry was down a point and a half. So we really feel very good about the strength of our brands overall, particularly this quarter.”
Hurricanes and unseasonably warm temperatures in much of the country stymied sales early in Q3, but sales picked up as the weather cooled, especially at Old Navy, executives said. In light of its overall performance, the company raised its outlook for the year, saying in its release that it now expects net sales to be up 1.5% to 2%, rather than just “up slightly” before, and for gross margin to expand by 220 basis points, up from the previous 200.
Work is being done across the portfolio to address weaknesses at each banner, with notable progress at Gap. The brand has tumbled from its place as an arbiter of American style, and Dickson has articulated a goal of returning Gap to a place of importance in both fashion and culture. That includes changes to its assortment as well as its marketing, and Dickson said the brand is gaining new attention.
“Our focus on reigniting Gap's leadership in trend-right products and creative expression through big ideas and culturally relevant messaging is resonating,” he said, noting that as of Q3 the brand has had four straight quarters of positive comps and six straight quarters of share gains. “Our campaigns and collaborations are attracting a new generation to Gap, while at the same time reinforcing the brand to those who have loved us for years.”
Dickson arrived from Mattel last year with high-profile turnaround successes under his belt, including at Barbie, and the pressure has been on him ever since to rehabilitate an apparel conglomerate that seemed to have lost its touch. Following the company’s Q3 report, several analysts credited Dickson with what has now been a string of improvements across the portfolio. As a result, though, the spotlight on him has probably only intensified, according to Wells Fargo analysts as well as Jefferies analysts led by Corey Tarlowe.
“We believe Mr. Dickson's prior experience in reinvigorating brands including Barbie, Hot Wheels, and Fisher-Price provides GAP with a head start in both formulating and implementing its playbook to drive improvements across the business,” Tarlowe said in emailed comments Friday. “Therefore, we expect investors to increasingly focus on Mr. Dickson's approach to improving brand relevance and the company's overall product offering.”
Some investors will view Dickson as “the strongest leader [Gap inc.] has seen in 10+ years and ... driving one of the best turnaround stories in retail,” while others will worry that he will ultimately fail to execute, according to Wells Fargo.
