Earnings Results: Gap shares rally as signs of discounting ease

Shares of Gap Inc. jumped in extended trading Thursday after the clothing retailer reported third-quarter results that beat expectations and margins that ticked higher, helped by easing pressure to cut prices. And the company held to its full-year outlook, despite forecasting potentially weaker sales in the fourth quarter amid uneven performances at its stores.

The company — which also runs Old Navy, Banana Republic and the women’s athletic apparel chain Athleta — cited “improved promotional activity in the quarter,” a reference to the competitive markdowns across the clothing-retail industry due to weaker demand.

That helped the chain’s margin profile, with both gross margins and merchandise margins rising.

reported third-quarter net income of $218 million, or 58 cents a share, compared with $282 million, or 77 cents a share, in the same quarter last year. Adjusted for restructuring costs, Gap earned 59 cents a share.

Revenue fell 7% to $3.8 billion, weighed by the sale of Gap China. Same-store sales slipped 2%.

Analysts polled by FactSet expected the clothing chain to report adjusted earnings per share of 20 cents on revenue of $3.61 billion, with same-store sales down 8.7%.

Management said it expected fourth-quarter sales to be “flat to slightly negative” compared to the $4.2 billion it notched last year, as “positive signs at Old Navy and Gap balance the continued work underway at Athleta and Banana Republic.” FactSet estimates called for $4.26 billion in sales.

At Old Navy, the company’s biggest store segment, executives said they “saw strength” in women’s and children’s apparel and an “acceleration” in activewear, after rising prices in prior months weighed on demand among low-income customers. At Gap stores, women’s and baby clothing helped results.

They said Banana Republic “continues to work toward re-positioning itself as a premium lifestyle brand.” While at Athleta, they said sales suffered following last year’s “elevated discount levels.”

Gap also held to its full-year outlook, saying that sales “could be down in the mid-single-digit range” when compared with last year’s sales of $15.6 billion. FactSet forecast sales of $14.71 billion.

“As we look to the remainder of the year, we are reaffirming our full-year revenue outlook, which balances the progress we are seeing with a prudent view of the economic and consumer environment in which we are operating,” Chief Financial Officer Katrina O’Connell said in a statement.

Shares jumped 14% after hours.

Heading into the results, analysts had expressed concern for demand for apparel, as rising prices for essentials like groceries make for a more cautious and selective consumer.

Executives at Target Corp.
on Wednesday said that as prices for basics ease, customers would eventually have more room to spend on more discretionary items. But Wall Street analysts remained skeptical.

Gap’s sales fell in the prior quarter, dragged lower in part by “slower demand from the lower-income consumer” at Old Navy. Chief Executive Richard Dickson, during Gap’s earnings call in August, said “Clothing is a rational need while fashion is an emotional one. Our brands will balance both.”

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