Here's where Gap still faces challenges, after shares rallied on earnings results

By Bill Peters

'Our brands are all in different stages of reinvigoration,' clothing retailer's CEO says

Clothing retailer Gap Inc. on Thursday said it expects continued gains from its namesake stores and Old Navy locations this year, helped by more enthusiasm from women shoppers and refreshed marketing efforts - but added that getting its Banana Republic and Athleta brands back on track would take more time.

Taken together, the good and the bad amounted to a forecast for "roughly flat" sales this year, compared with the $14.9 billion top-line figure that Gap (GPS) put up last year. And the company said it doesn't expect any big changes this year to clothing shoppers' habits or the broader pressures posed by higher prices.

"Our brands are all in different stages of reinvigoration," Chief Executive Richard Dickson said on Gap's earnings call Thursday.

Management made that assessment after better-than-expected fourth-quarter results sent shares 5% higher in after-hours trading. Those results were led by Old Navy, where same-stores sales were up 2%, and Gap's namesake stores, where they rose 4%.

Dickson said that within Old Navy, cargo pants and skinnier "pixie" pants, along with an ad campaign featuring actress Natasha Lyonne, helped drive demand during the fourth quarter. Within the Gap brand, he said softer, cashmere-like fabrics - and related marketing and in-store displays - made demand for sweaters a highlight during the quarter.

But Dickson said Banana Republic was "behind" on product assortment and pricing as the company tries to refashion the chain into a high-end destination - noting that the year ahead would be about getting back to basics with a focus on khakis, Oxford shirts and sweaters. And Athleta, Gap's women's athletic-wear chain, was still dealing with the fallout from weaker demand, he noted.

Same-store sales for Banana Republic fell 4% during the fourth quarter, while they dropped 10% for Athleta.

Gap's efforts to make its namesake stores more culturally relevant and to boost Old Navy's marketing mirror those of fellow clothing retailers. Last month, Urban Outfitters Inc. (URBN) said that shoppers had lost some of their "exuberance" for buying things and that it was reviewing "all aspects" of its namesake stores, whose assortments it has tried to make more fashionable.

Those revamp efforts come as other apparel retailers continue to struggle with apprehensive shoppers navigating higher-priced necessities.

Ross Stores Inc. (ROST) this week said those higher costs were still pressuring customers and that it would take a conservative approach to its outlook. Victoria's Secret & Co. (VSCO) also said it was staying conservative amid weaker demand for intimate items in North America.

Along with broader consumer apprehension, the conflict along the Red Sea - which has diverted many shipping vessels away from the Suez Canal - could also disrupt some business for Gap, among other retailers. The fighting there has caused shipping delays and pushed shipping costs higher.

Gap Chief Financial Officer Katrina O'Connell said that the company was preparing for multiple situations that could bring "modest headwinds in the first half of the year related to late deliveries as a result of geopolitical issues in the Red Sea." But she added: "We currently expect that impact will moderate in the second half of 2024."

For the fourth quarter overall, Gap reported net income of $185 million, or 49 cents a share, in the holiday-season quarter, contrasting with a loss of $273 million, or 75 cents a share, in the year-prior quarter. Revenue rose 1%, to $4.3 billion, while same-store sales were flat.

Analysts polled by FactSet expected Gap to report adjusted earnings per share of 23 cents on revenue of $4.22 billion, and a same-store sales decrease of 1.1%.

"The fourth quarter exceeded expectations on several key metrics along with market-share gains, reflecting improved trends at Old Navy and Gap and strong continued progress on margins and cash flow," Dickson said in a statement.

For the current first quarter, the company also forecast "roughly flat" sales, compared with $3.3 billion a year ago. Analysts estimated first-quarter sales of $3.27 billion.

-Bill Peters

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03-07-24 2017ET

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