Gap, Inc. reported sales at its Athleta banner were down 18 percent in the third quarter to $279 million with same-store sales sliding 19 percent.
Gap said in a press release, “Sales in the quarter continued to be challenged as the brand laps last year’s elevated discount levels and the team works to reengage its core customer through better product and brand right marketing.”
Athleta operated 279 stores at the close of the quarter, up from 257 at the year’s start. It opened 24 stores and closed seven during the year.
Companywide, Gap reported both earnings and sales topped guidance but kept its guidance for the year.
Gap’s sales reached $3.8 billion, down 7 percent compared to last year, inclusive of an estimated 2 percentage points of negative impact from the sale of Gap China. Analysts’ consensus estimate was $3.6 billion.
Comparable sales were down 2 percent. Store sales decreased 6 percent compared to last year. The company ended the quarter with 3,533 store locations in over 40 countries, of which 2,598 were company-operated. Online sales decreased 8 percent compared to last year and represented 38 percent of total net sales.
Among its other banners, Old Navy’s net sales were $2.13 billion, down 1 percent compared to last year. The brand saw strength in women’s and kids and baby during the quarter, as well as an acceleration in the active category compared to the second quarter of fiscal 2023. Comparable sales were up 1 percent.
At the Gap banner, sales were $887 million, down 15 percent compared to last year. Excluding the estimated negative impact from the sale of Gap China and the shutdown of Yeezy Gap, net sales were down about 6 percent versus last year. The brand saw strength in women’s and baby during the quarter. Comparable sales were down 1 percent.
Banana Republic’s sales sales reached $460 million, down 11 percent compared to last year. Banana Republic continues to work toward re-positioning itself as a premium lifestyle brand and acquiring new, high-value customers. Comparable sales were down 8 percent.
Gross margin of 41.3 percent increased 390 basis points versus last year’s reported gross margin and increased 260 basis points versus last year’s adjusted gross margin which excluded $53 million in impairment charges related to the decision to discontinue the Yeezy Gap business. Merchandise margin increased 460 basis points versus last year on a reported basis. Compared to last year’s adjusted rate, the merchandise margin increased 340 basis points primarily due to lower commodity costs and improved promotional activity in the quarter.
Reported operating income was $250 million, or an operating margin of 6.6 percent. Adjusted operating income, excluding $5 million in restructuring costs, was $255 million, or an adjusted operating margin of 6.8 percent, up from $156 million, or a 3.9 percent, a year ago.
Reported net income reached $218 million, or 58 cents per share. Adjusted net income, excluding restructuring costs, was $221 million, or 59 cents a share, against adjusted EPS of $260 million, or 71 cents a year ago. Analysts’ consensus estimate had been 20 cents a share.
Fiscal 2023 Outlook
“Our third quarter results reflect ongoing progress, with gross margin expansion and operating margin improvement, resulting in strong free cash flow generation,” said Katrina O’Connell, Executive Vice President and Chief Financial Officer, Gap Inc. “As we look to the remainder of the year, we are reaffirming our full-year revenue outlook, which balances the progress we are seeing with a prudent view of the economic and consumer environment in which we are operating.”
The fourth quarter and fiscal 2023 will include an additional week estimated to positively impact net sales by $150 million. The company is estimating fourth-quarter net sales, inclusive of the 14th week, to be flat to slightly negative compared to last year’s net sales of $4.2 billion as positive signs at Old Navy and Gap balance the continued work underway at Athleta and Banana Republic. As a reminder, the sale of Gap China to Baozun Inc. closed on January 31, 2023. Fourth quarter 2022 net sales included approximately $90 million in sales for Gap China.
The company continues to anticipate that fiscal 2023 net sales, inclusive of the 53rd week, could be down in the mid-single digit range compared to last year’s net sales of $15.6 billion. As a reminder, fiscal 2022 net sales included approximately $300 million in sales for Gap China.
The company continues to expect gross margin expansion for fiscal 2023. At the estimated level of sales described above, the company is planning adjusted operating expenses of approximately $1.4 billion in the fourth quarter and approximately $5.15 billion for fiscal 2023.
The company now expects fiscal 2023 capital expenditures of about $475 million, below its prior range of $500 million to $525 million, due in part to fewer store openings.
The company now expects to open a net total of 15 to 20 Old Navy and Athleta stores in fiscal 2023. The company continues to expect to close a net total of about 50 Gap and Banana Republic stores this year, completing its plan to close 350 Gap and Banana Republic stores in North America by the end of fiscal 2023.
Photo courtesy Athleta
