Popular clothing retail brand Gap significantly cut its profit guidance for the fiscal 2022 year after Old Navy sales sank in fiscal Q1.
The Gap Inc (NYSE: GPS) saw its shares sink 13% after slashing its profit guidance for the year. The popular American clothing and accessories retailer ascribed this to fiscal Q1 sales decline caused by poor Old Navy sales for the period. According to Gap CEO Sonia Syngal, macroeconomic factors such as inflation are beginning to bear down on the lower-income consumer. In addition, there has been a swift and drastic change in shopping trends lately. In a media session, Syngal explained that shoppers are gravitating towards party dresses and office clothes at the expense of Old Navy’s active clothes and fleece hoodies.
How Old Navy Fared
Ongoing inventory delays and increased promotions to discount prices affected Old Navy’s performance for the quarter. Furthermore, the Gap-owned clothing and accessories retailer was also pulled lower for the fiscal first quarter due to an imbalanced mix of clothing sizes.
In hindsight, Gap executives suggested that the Old Navy size imbalance was created by the company’s desire to increase sales of plus-size clothing items. As a result, Old Navy did not have enough of its core sizes in the inventory, while a significant chunk of the larger sizes remained unpurchased. According to Gap CFO Katrina O’Connell:
“Our hindsight is that maybe with the inclusive sizing launch, we had gotten away from really messaging, the core of what works for Old Navy, which is that value messaging. We really are trying to go back to that.”
In addition, Gap also suggested that consumer shopping behavior and preferences had a skewed effect on its inventory offerings. Syngal explained:
“We’re dealing with really volatile consumer signals – whether it was last year in Covid, or this year’s post-Covid behaviors. Over time, we’ll see customer preference for product types balanced out.”
O’Çonnell also added that the company’s inventory levels were significantly higher than hoped.
Gap Profit Guidance Outlook, Sales Report so Far
For its fiscal 2022-year, Gap is anticipating between 30 and 60 cents per share on an adjusted basis. This represents a substantial drawdown from a prior range of $1.85 and $2.05. It is also way off the general consensus estimate of $1.34 per share.
Gap’s revenue slumped 13% from $3.99 billion to $3.48 billion year over year (YoY), edging out expectations. Furthermore, same-store sales dropped 14% from the preceding year, exceeding analysts’ estimated 12.2% drop. In addition to this, Gap also reported a 17% decline in online sales and a 10% YoY setback for in-store sales.
As it stands, two of Gap’s three clothing and accessories brands also experienced declines in same-store sales performance. Old Navy and Athleta are down 22% and 7% YoY, respectively. On the other hand, Banana Republic is up 27% YoY.
The results from Gap and its affiliated brands reflect a bigger growing discrepancy in the American clothing retail space. While Gap struggles with mixed results from its target cost-conscious consumers, wealthier shoppers continue to splurge on expensive outfits. Stores like Nordstrom, Bloomingdale’s, and Ralph Lauren are benefitting from well-heeled shoppers.
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