GapInc. Outperforms Expectations in Q3

by Warren Seah

GapInc. exceeded expectations in the third quarter, showcasing a promising start under the leadership of its new CEO, Richard Dickson.

The company reported net sales of $3.8 billion, a 7% decline compared to the same quarter last year. However, this figure surpassed the $3.5 billion achieved in the previous quarter. Despite this drop, GapInc. managed to outshine Wall Street estimates by reporting adjusted earnings per share of 59 cents, far surpassing the expected 20 cents per share.

Analysts had projected revenue of $3.6 billion, but GapInc. performed even better. It is worth noting that the decline in quarterly revenue includes a predicted two percentage point impact resulting from the sale of Gap China in January 2023.

Investors responded positively to the news, with GapInc. shares surging more than 15% in after-hours trading. Year-to-date, the company’s shares have risen by an impressive 21%.

In terms of same-store sales, GapInc. experienced a more favorable outcome than anticipated. While analysts were expecting an 8.7% decline in this regard, the actual figure stood at a modest 2%, showcasing signs of resilience and adaptability.

Continuing a positive trend from the previous quarter, when GapInc. reduced its inventory by 29%, the company announced that its inventory was 22% lower compared to the previous year’s third quarter.

However, some areas of the business experienced declines in net sales. Old Navy saw a 1% drop, Gap stores suffered a 15% decrease, Banana Republic faced an 11% decline, and Athleta reported an 18% fall.

CEO Dickson emphasized GapInc.’s solid performance throughout the third quarter, highlighting the company’s market share gains, enhanced gross margins, and improved operating margins. He praised their commitment to operational and financial discipline, which has positioned the company on a stronger financial foundation. With this newfound strength, the company can focus on revitalizing their portfolio of brands, strengthening their operating platform, and reinvigorating their culture for future success.

Gap’s CEO Doug Dickson aims to revive the brand

  Dickson assumed the role of CEO for Gap in August, following his departure from Mattel where he held the positions of president and chief operating officer. Since his appointment, Dickson has been tasked with breathing new life into Gap’s legacy brands by implementing strategic changes and attracting consumers in a challenging economic environment.

Steady outlook amidst economic uncertainty

  The retailerhas recently confirmed its full-year revenue outlook. Chief Financial Officer, Katrina O’Connell, states that this outlook strikes a balance between acknowledging the progress they are making and maintaining caution due to the uncertain economic and consumer landscape in which they operate.

Factors affecting Q4 and fiscal 2023

  Gap’s fourth-quarter and fiscal 2023 period includes an extra week, which is expected to contribute $150 million in net sales. However, despite this additional week, net sales for the period are anticipated to remain flat or slightly negative compared to the previous year’s figure of $4.2 billion. This decrease is primarily due to the absence of approximately $90 million in sales generated by Gap China. The company sold its Gap China division on January 31.

Potential decline in net sales for fiscal 2023

  For the entirety of fiscal 2023, net sales for Gap could experience a decline in the mid-single digits compared to the previous year’s total of $15.6 billion. This decline is largely attributed to the exclusion of $300 million in sales generated by Gap China in the respective period.

Experts optimistic about Gap’s future

  Wells Fargo analyst, Ike Boruchow, recently upgraded Gap’s shares and increased his target stock price to $16 from $11. Boruchow believes that Dickson’s leadership and vision can infuse new vitality into Gap’s legacy brands. Furthermore, Boruchow expresses confidence in the ability of the newly appointed CEOs at Old Navy and Athleta to contribute to the strengthening of Gap’s various brands.

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