Gap, Old Navy Disappoint in First Quarter

The retailer’s stock dropped as comparable-sales growth at Old Navy decelerated and Gap stumbled operationally.

Weaker comparable-sales growth at Old Navy and operational missteps at Gap took some of the wind out of Gap Inc. first-quarter results.

The specialty retailer, however, managed to keep profits rising. Net income increased 14.7 percent to $164 million, or 42 cents a share, from $143 million, or 36 cents, a year earlier. Sales for the quarter ended May 5 rose 10 percent to $3.78 billion from $3.44 billion.

But the firm’s first-quarter comparable sales increased just 1 percent, below the 1.9 percent analysts were projecting, according to S&P Capital IQ. Investors took the comp-sales miss hard and sent shares of the company down 8.4 percent to $30.20 in after-hours trading Thursday.

Old Navy, which has been the company’s growth engine in recent quarters, decelerated significantly, with comp sales up just 3 percent after an 8 percent gain a year ago. Gap comped down 4 percent after a 4 percent decline a year earlier. And the long-struggling Banana Republic business showed some signs of life with a 3 percent comp gain following a 4 percent decline.

Art Peck, president and chief executive officer, emphasized the company’s “balanced growth strategy” on a conference call with analysts and talked about the continued expansion at Old Navy as well as the changes at Gap and the growing potential at Athleta.

“We are focused on growth in the active and value space,” Peck said. “We continue to responsibly rationalize our store foot in specialty real estate. We are investing in our online and mobile channels, a business for us that is $3 billion and growing. We are enhancing our productivity across the enterprise and we are beginning to unlock the value of our customer data assets across brand across channel.”

The Gap brand — which is in turnaround mode and Peck has compared to Old Navy in 2015 — suffered from “the carryover of operational missteps” and is being refocused following the February departure of brand ceo Jeff Kirwan. (Brent Hyder, the company’s executive vice president of global talent and sustainability, is leading the brand on an interim basis).

“We saw the problem, we took action,” Peck said.

And that also meant making some tough inventory choices that rippled across the company’s quarterly statement. The company’s gross margins, excluding the impact of some accounting changes, fell by 120 basis points to 36.7 percent, a decline largely attributed to the Gap brand.

“My experience now has been…if you have too much inventory or the wrong inventory, holding onto it does not make it better,” the ceo said. “And so we were very decisive on that and took those actions. It wasn’t without pain but we believe it was absolutely the right thing to do to continue to clean up the business and position it for better performance as we get into Q2 and then into the back half.”

Teri List-Stoll, executive vice president and chief financial officer, added: “The root cause of the challenges [at the Gap brand] is not significant product acceptance issues, but rather operational missteps around timing of inventory receipts, breadth of the assortment and lack of depth in some categories.”

Despite a disappointing first quarter, the 3,171-door retailer is sticking by its guidance, which calls for comparable sales to be “flat to up slightly” this year as earnings per share rise to $2.55 to $2.70 from adjusted EPS of $2.13 last year.

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