Gap shares fall over 10% after retailer slashes profit guidance for the year

Gap Inc. on Thursday lowered its full-year profit guidance as it reported a decline in first-quarter tax sales, which was reduced by its Old Navy operations.

The stock fell more than 10% after hours, after ending the day with 4%.

An unbalanced mix of clothing sizes, ongoing inventory delays and an increase in price-cutting campaigns put an end to Old Navy’s performance during the quarter.

The lower-income consumer, who is Old Navy’s target customer, is starting to feel pressured by inflation, CEO Sonia Syngal told CNBC. Shoppers have also quickly gone from buying active clothing and hoodies in fleece – Old Navy’s “sweet spot” – to looking for party dresses and office clothes, she said in a telephone interview.

“We are dealing with really volatile consumer signals – whether it was last year in Covid, or this year’s behavior after Covid,” said Syngal. “Over time, we will see that customers’ preferences for product types are balanced out.”

The results from Gap signal a major difference that is being formed in the retail trade between the companies that turn to Americans with a lot of money in their wallets and those that sell to cost-conscious shoppers who are looking for business.

When inflation warms up, the latter have been hit hardest and have already begun to limit certain purchases. Meanwhile, the richest consumers continue to spend on expensive clothes, jewelry and luggage for the summer holidays in stores such as Nordstrom, Bloomingdale’s and Ralph Lauren.

By the end of April, Gap had warned of obstacles in the Old Navy business when it announced the resignation of the unit’s CEO, Nancy Green. Syngal has helped lead the low-cost clothing brand in the meantime, as the company is looking for a successor to Green.

For the financial year 2022, Gap now expects to earn between 30 cents and 60 cents per share, on an adjusted basis. That’s a decrease from a previous range of 1.85 and $ 2.05. And far below analysts’ expectations of $ 1.34 per share, based on Refinitive data.

Chief Financial Officer Katrina O’Connell said Gap revised its outlook to take into account the “challenges” of the Old Navy, an uncertain macroeconomic environment and inflationary pressures. Plus, a slowdown in China that damages Gaps’ brand of the same name.

The gap turned to a net loss over the three-month period ending April 30 of $ 162 million, or 44 cents per share, compared to a net gain of $ 166 million, or a gain of 43 cents per share, a year earlier.

Revenue fell by about 13% to $ 3.48 billion from $ 3.99 billion a year earlier. It slightly exceeded expectations of $ 3.46 billion.

Gap said its sales figure was hit by an estimated 5 percentage points related to the retailer’s move from stimulus controls a year ago, in addition to about 3 percentage points from divestments, store closures and the transition of its European business to a partnership model.

Overall, sales in comparable stores fell by 14% from the previous year, more than the 12.2% decrease that analysts had been looking for. Within that figure, Gap said that their online sales decreased by 17% and that store sales decreased by 10% compared to last year.

Here is a breakdown of sales results in the same store, by brand:

  • Gap: Down 11% compared to previous year
  • Old Navy: Down 22% compared to last year
  • Banana Republic: up 27% compared to last year
  • Athleta: down 7%

Gap executives also acknowledged on Thursday that a recent push to sell more plus-size items at Old Navy resulted in the retailer not having enough of its core sizes for customers, and too much of the extended sizes not being purchased.

“Our hindsight is that with the inclusive size launch, we might have gotten away from actually sending messages, the core of what works for Old Navy, which is the value messages,” CFO O’Connell told CNBC in a phone call. “We’re really trying to go back to that.”

Gaps’ total inventories as of April 30 increased by 34% compared with the previous year.

These levels will begin to decline throughout the year, O’Connell said, but may remain elevated during the second quarter.

“Our inventory levels were significantly higher than we had hoped,” O’Connell said, adding that nearly half of the unwanted increase was due to extended transit times, which she expects will not improve any time soon.

This story is evolving. Come back for updates.

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