Gap Insists It Is Making Progress Despite Declining Sales

The Gap Inc GPS delivered better than expected results despite sale drops across all its brands and fourth quarter of net losses. Gap’s report comes after its peers, Urban Outfitters Inc. URBN, Kohl’s Corporation KSS and Abercrombie & Fitch Co. ANF also largely exceeded earnings expectations this week. But Gap’s shares surged about 15% upon news as gross margins have improved. This is a positive wave after earlier apparel such as the one from Foot Locker FL who has major fixes to do if it wants to prevent being crushed by the leading seller of apparel and footwear in the U.S., no other than the e-commerce titan itself Amazon.com Inc AMZN. 

First Quarter Key Figures

For the quarter ended on April 29th, Gap reported revenue of $3.28 billion, translating to a decline of 6% YoY with comparable sales declining by 3% across Gap’s four brands and store sales dropping 4% compared to last year’s comparable quarter. As sales go back to ‘pre-pandemic’ trends, online sales, which made up 37% of total net sales, dropped 9% YoY. Even its peer Foot Locker Inc FL showed with its latest results it desperately needs a better digital game as it competes not only with Amazon but all brands that sell their merchandise directly to customers, such as Nike Inc NKE.

But when compared to the fiscal first quarter of 2019, they rose as much as 39%. 

Compared to last year’s comparable quarter when Gap lost $162 million, or 44 cents a share, net loss narrowed to $18 million, or 5 cents per share. Adjusted earnings amounted to $3 million, or 1 cent per share. 

Abercrombie & Fitch Has Evolved

After surpassing analyst expectations both for its quarterly results and guidance, the apparel retailer showed it successfully changed the identity of its brand from “T shirt and jeans” to lifestyle choice as millennials are purchasing its clothing for their return to the office. Net sales grew 2.9% YoY to $836 million to $814.4 million with brand comparable sales rising 14%. Unlike Gap’s relatively unchanged guidance, Abercrombie & Fitch expects full year net sales growth in the range between 2% and 4%, with second quarter sales being off to a great start. 

Urban Outfitters Benefitted From a More Stable Supply Chain

Unlike Foot Locker whose margins got dented by promotions, Urban Outfitters managed to control its promotions and as a result, its margins increased 2.6 percentage points owed to higher merchandise markups driven by lower freight costs. During the quarter that ended on April 30th, sales rose 6% YoY to $1.11 billion and resulted in a net income of $52.82 million, or 56 cents a share, which is an impressive improvement from last year’s comparable quarter when Urban Outfitters made $31.53 million, or 33 cents a share.

Gap Needs To Work On A New Brand Identity

All in all, results show that cost-cutting measures are resulting in improved performance. Lower air freight expenses, less reliance on discounts and promotions who harm margins, a reduced headcount and trimmed expenses have all contributed to the improvement but the above results also suggest that the Gap eeds to go beyond cost cutting to reposition itself for long-term growth, like its peer Abercrombie & Fitch. But when it comes to a business where someone like Amazon is leading the way, without even counting on physical stores, this is a daunting task. Like Foot Locker, Gap needs to encourage loyalty of its customers and make its brand image appealing to their lifestyles as otherwise it risks being smashed by comeptitors, including Amazon. It certainly does not help that with its empire and smart algorithms, Amazon is even disrupting the concept of a personal style. Gap management acknowledges this need for a critical change and continues its path towards improving its business by concrete actions, such as conducting research to better understand its consumers. But is it able to pull it off in a world where Amazon is constantly upleveling its game is a whole other story. 

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice