Gap earnings beat outshines bleak holiday-quarter sales forecast

By Katherine Masters and Ananya Mariam Rajesh

(Reuters) -Gap on Thursday forecast holiday-quarter sales below estimates, but posted better-than-expected results for the third quarter thanks to easing supply expenses, cost-control efforts and improving sales at Old Navy, sending its shares up 15% in extended trading.

The retailer – like Walmart (NYSE:) and Target – has struck a cautious tone heading in to the all-important shopping season as consumers tighten spending.

Gap, once a sought-after apparel maker, has taken a hit from shoppers turning to rivals like Shein and Amazon.com (NASDAQ:) for newer styles.

In a post-earnings call, CEO Richard Dickson acknowledged the company had taken “significant promotions and markdowns” over the last year due to “product misfires” and marketing that failed to resonate with shoppers.

“We need to create trend-right product assortments with a clear point of view,” he said.

The company expects fourth-quarter net sales to be flat to slightly negative, compared with analysts’ expectations for a 0.33% rise, according to LSEG data.

Banana Republic and Athleta’s sales fell 11% and 18% in the third quarter, while Old Navy, Gap’s biggest brand, recorded a 1% decline.

Gap’s across-the-board drop in sales is concerning, said Coresight Research CEO Deborah Weinswig, adding that the company needs to continue focusing on its product-assortment challenges rather than other ways to boost revenue.

“Other retailers are farther ahead in innovation while Gap still needs to get its house in order,” Weinswig said.

Still, the company has cut costs by eliminating jobs and shutting underperforming Gap and Banana Republic stores. Easing freight and manufacturing costs also boosted results.

Gap posted an adjusted profit of 59 cents per share, crushing estimates of 19 cents. Its net sales of $3.78 billion – mainly aided by its Old Navy brand – beat Wall Street expectations of $3.60 billion.

Old Navy was a clear winner this quarter, while the company’s once-growing brand Athleta continued to slide, CFRA Research analyst Zachary Warring said.

“GPS has a strong balance sheet and has managed inventory well in recent quarters,” Warring said. “Continues to move in the right direction.”

Gap’s chief financial officer, Katrina O’Connell, said the company expected a longer recovery timeline for Banana Republic and Athleta, with sales expected to decline through the fourth quarter.

Gap reiterated that fiscal 2023 net sales would decline in the mid-single-digit range.