Gap (GPS) publishes its results for the first quarter of 2022

Gap Inc. on Thursday slashed its full-year profit forecast citing a decline in fiscal first-quarter sales, which were dragged down by its Old Navy business.

Shares fell about 13% after hours, after ending the day up 4%.

An imbalanced mix of apparel sizes, continued inventory delays and increased price-cutting promotions hurt Old Navy’s performance in the quarter.

The low-income consumer, who is Old Navy’s target customer, is starting to feel the pinch of inflation, chief executive Sonia Syngal told CNBC. Shoppers also quickly shifted from shopping for active wear and fleece hoodies — the Old Navy’s “sweet spot” — to shopping for party dresses and office wear, she said. during a telephone interview.

“We’re dealing with very volatile consumption signals – whether it’s last year in Covid, or this year’s post-Covid behaviors,” Syngal said. “Over time, we will see customer preference for product types even out.”

The Gap results signal greater divergence emerging in the retail sector between companies that cater to Americans with lots of cash in their wallets and those that sell to cost-conscious shoppers looking for deals. .

With the rise in inflation, the latter are the hardest hit and have already started to reduce some purchases. Meanwhile, wealthier consumers continue to splurge on expensive summer vacation outfits, jewelry and luggage at stores including Nordstrom, Bloomingdale’s and Ralph Lauren.

In late April, Gap warned of hurdles within the Old Navy business when it announced the departure of the unit’s general manager, Nancy Green. Syngal has helped run the discount clothing brand in the meantime, as the company searches for a successor to Green.

For fiscal 2022, Gap now expects to earn between 30 cents and 60 cents per share, on an adjusted basis. This is down from a previous range of $1.85 and $2.05. And well below analysts’ expectations for $1.34 per share, based on Refinitiv data.

Chief Financial Officer Katrina O’Connell said Gap had revised its outlook to take into account Old Navy’s “execution challenges”, an uncertain macroeconomic environment and inflationary cost pressures. Additionally, a slowdown in China is hurting Gap’s eponymous brand.

Gap posted a net loss in the three months ended April 30 of $162 million, or 44 cents per share, compared with net income of $166 million, or earnings of 43 cents per share, a year earlier.

Revenue fell about 13% to $3.48 billion from $3.99 billion a year earlier. This is slightly above expectations of $3.46 billion.

Gap said its revenue was hit by about 5 percentage points related to the retailer passing stimulus checks a year ago, in addition to about 3 percentage points from divestitures, store closures and the transition of its European operations to a partnership model.

Overall, same-store sales fell 14% from a year earlier, more than the 12.2% decline analysts had been looking for. In that figure, Gap said its online sales were down 17% and in-store sales fell 10% from a year ago.

Here’s a breakdown of same-store sales performance, by brand:

  • Variance: down 11% year-over-year
  • Old Navy: down 22% year over year
  • Banana Republic: +27% year over year
  • Athlete: down 7%

Gap executives also acknowledged Thursday that a recent push to sell more plus-size items at Old Navy has resulted in the retailer not selling enough of its base sizes to customers, and too many extended sizes that don’t. were not purchased.

“Our look back is that maybe with the launch of inclusive size we’ve moved away from messaging, the core of what works for Old Navy, which is that value messaging,” said CFO O ‘Connell to CNBC on a phone call. “We’re really trying to get back to that.”

Gap’s total inventory as of April 30 was up 34% from a year earlier.

These levels will begin to decline throughout the year, O’Connell said, but could remain high in the second quarter.

“Our inventory levels were significantly higher than we had hoped,” O’Connell said, adding that almost half of the unwanted increase was due to extended transit times which she says are not expected. won’t improve anytime soon.

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