Gap Inc. on Thursday reported quarterly earnings and sales that topped analysts’ lowered expectations, after the company warned earlier this month that it was anticipating dismal results.
Its once-strong Old Navy brand struggled to move women’s apparel off of shelves, resulting in a third-quarter same-store sales decline of 4%. The company said it “lost sight of what [the Old Navy] consumer really valued.”
Despite the poor performance, the company said it remains committed to its plans to spin off Old Navy into its own company, which is expected to close in the middle of 2020.
“We continue to make progress against our separation plans, which will provide improved focus and a further catalyst for transformation,” Gap’s interim CEO Robert Fisher said. “Both companies will benefit from this, but new Gap Inc. in particular will have a renewed urgency and catalyst to reinvest how it operates.”
Gap also announced Thursday it plans to exit Old Navy from China in early 2020, focusing instead on “under-served” North American markets.
Gap shares rose about 1.5% in after-hours trading on the news.
Here’s how Gap did during its fiscal third quarter compared with what analysts were expecting, based on Refinitiv data:
- Earnings per share: 53 cents, adjusted, vs. 51 cents expected
- Revenue: $4.00 billion vs. $3.96 billion expected
- Same-store sales: down 4% vs. a drop of 2.3% expected
Gap earlier this month announced the departure of its CEO since 2015, Art Peck, effective immediately. Peck has temporarily been replaced by Fisher, son of the company’s founders.
The company continues to search for a new CEO, considering both internal and external candidates, Fisher explained during a post-earnings call with analysts.
When it announced the management shake-up, Gap offered a glimpse at its third-quarter performance, warning it would be weak. The clothing retailer said third-quarter companywide same-store sales fell 4%, compared with flat growth a year ago. It said same-store sales at the Gap brand were down 7%, they fell 3% at Banana Republic, and slipped 4% at Old Navy.
At that time, the retailer slashed its full-year profit outlook, saying it expects to earn between $1.70 and $1.75 a share. It reaffirmed that outlook on Thursday. Analysts had been calling for adjusted earnings per share of $1.83.
Also on Thursday, it said it expects total same-store sales for the fiscal year to be down mid single digits, compared with a prior outlook of down low single digits. Net sales should decline at a low single digit pace. Analysts had been calling for a 2.1% drop.
“We are not pleased with the third quarter results and are focused on aggressively addressing the operational issues that are hindering the performance of our brands,” Fisher said.
Net income during the period ended Nov. 2 fell to $140 million, or 37 cents a share, from $266 million, or 69 cents per share, a year ago. Excluding one-time items, Gap earned 53 cents per share, better than the 51 cents analysts were expecting, based on a poll by Refinitiv.
Net sales dropped about 2% to $4.00 billion from $4.09 billion a year ago, beating expectations for $3.96 billion.
With Peck’s abrupt departure, analysts have since been casting doubt that a looming split of Old Navy and Gap will go through, especially with the Old Navy brand in such poor shape. The company announced in February it planned to split Gap into two publicly traded companies.
But CFO Teri List-Stoll told analysts on Thursday that “employees are energized” about the split, and there’s “renewed optimism” about that plan, even after Peck’s departure.
“The change of management [at Gap] provides the company with an opportunity to shift its mindset,” GlobalData Retail Managing Director Neil Saunders said. “Whether it grasps it, remains to be seen.”
Gap Inc. shares, as of Thursday’s market close, are down nearly 40% this year. The retailer has a market cap of about $6.1 billion.
Read the full earnings press release here.
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