Shares of Gap Inc. launched higher after hours Thursday after the clothing retailer reported third-quarter results that beat expectations, as easing pressure to cut prices and a rare same-store sales gain from Old Navy offset mixed store performances and lingering holiday-season caution.
The company — which also runs Old Navy, Banana Republic and the women’s athletic apparel chain Athleta — reported earnings as it tries to refresh consumer perceptions of its stores, amid concerns of flagging relevance. It reported after higher prices for basics last year vacuumed up a bigger chunk of shoppers’ savings, leaving less money to spend on things like clothing.
However, Walmart Inc.
WMT,
on Thursday said it expected a “period of deflation” up ahead, while management at Target Corp.
TGT,
on Wednesday expressed hope that “moderating” prices for essentials could free up more spending for things like clothing and other more discretionary items.
Gap
GPS,
on Thursday cited “improved promotional activity” in the third quarter, a reference to the competitive markdowns that have spread across the clothing-retail industry over the past year due to weaker demand. And it said that a leaner inventory, as its stockpiles of unsold goods fell 22%, and a trendier clothing selection helped keep it from slashing prices more aggressively during the period. Gap’s margin profile improved in the process.
Shares jumped 17% after hours.
Gap 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%.
However, same-store sales at Old Navy, the company’s biggest store chain, rose 1%, helped by “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. Same-store sales fell at Gap, Banana Republic and Athleta during the quarter.
Heading into the results, analysts had expressed concern about demand for apparel. And while discounts help customers, they hurt financials, and Gap executives tried to temper Wall Street’s expectations for the end of the year.
Despite the less-vigilant price-chopping in the third quarter, they said they expected promotions for the holiday-season quarter to be roughly the same as last season. Management said it expected fourth-quarter sales to be “flat to slightly negative” compared to the $4.2 billion it notched last year.
“As we enter the fourth quarter, we have a balanced view of the holiday season,” Chief Executive Richard Dickson said on Gap’s third-quarter earnings call Thursday. “Inventory positions are well-controlled, and our financial position is strong. However, we remain mindful of the uncertain consumer environment.”
During the call, he also cited areas of improvements for all four of its stores. The Gap, he said, “has been far too quiet in the cultural conversation.” Old Navy needed stronger marketing and product assortment to attract families, he said. The company is trying to turn Banana Republic into a “premium lifestyle brand” for wealthier customers, and clearing unwanted products from Athleta stores.
He said that things like the color red were trending, along with sweaters and sequins. And he said that the company would be trying to update its product offerings in something closer to real time
“I think that we’ve done a good job, and arguably a very good job, with providing what we call ‘the needs.’ And in that case, it’s providing great basics,” Dickson said. “What we have to do a better job of is creating the wants.”
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