By Thomas J. Ryan
Gap Inc. reported disappointing first-quarter results and lowered its full-year guidance as both Gap Brand and Old Navy recorded their weakest quarterly sales in three years. However, Athleta continues to be a winner as Gap officials revealed plans to accelerate the chain’s openings in 2019.
“Athleta continues to be one of North America’s fastest growing athletic brands that is positioned to capture share,” said Arthur Peck, Gap Inc.’s president and CEO, on a conference call with analysts. “Despite unseasonable weather, growth continues to outpace the market by a factor of two. We’re obviously all committed on Athleta, and in 2019, we are accelerating store growth with approximately 25 new stores versus our historical average of 15 to 20 openings per year.”
Athleta added four stores in the current quarter to close with 165. Net store openings were 13 in 2018, 16 in 2017 and 12 in 2016.
Gap opened its first Athleta store in Strawberry Village Shopping Center in Mill Valley, CA, in 2010. Athleta sold its women’s activewear only through its catalog and website when Gap acquired the business in September 2008.
As in prior calls, Peck called out the benefit Athleta is receiving from its sustainability initiatives. Athleta just celebrated its first year as a B Corp with significant progress against goals, including 60 percent of materials now being made from sustainable fibers. Said Peck, “Customers connect with the fundamental ethos of the brand in a way that is difficult to duplicate or replace, and that connection is part of why we’re so bullish on the Athleta opportunity moving forward.”
Teri List-Stoll, EVP and CFO, on the call said that while February was “tough” for Athleta with the cold and rainy weather patterns in that month, sequential improvement was seen in comp trends in the following months with a 12-point comp improvement from February to the combined March-April period.
The swim category was soft and that was largely related to some fit challenges. He said, “The team is evaluating how we can best serve our customers in this challenging category with several in-store test programs that will help us inform strategy for next year.”
List-Stoll added overall on Athleta, “Fundamental brand health remained strong, as evidenced by market share gains, continued customer file growth and strength in other key health metrics such as the average spend per customer and frequency.”
Further asked about the acceleration potential for Athleta in the Q&A session, Peck said Athleta was impacted by the weather trends in the quarter but he insisted the brand’s growth potential is exponential.
“I have zero concerns about the health of Athleta, zero concerns about the health of the brand, zero concerns about customer engagement,” said Peck. “If I had to call something negative out of the macro factors is swim, partly also by weather, but swim was a tougher category this year. And it’s something that we’ll continue to look at. I made some changes to the swim business when I was running Gap Brand, and it can be challenging, but that’s really the place where I’d have to put my finger. I think overall, again, we think Athleta is well-positioned in the space that it’s in. It’s got an incredibly loyal customer, it is truly omni. When you’re dealing with some unprecedented, unusual weather and she is standing on the sidelines for a moment, it is going to impact people. and I think you’ve seen that more broadly. But zero concerns about Athleta and nothing but absolutely bullish in the same way we had been about what their brand has in front of us.”
Companywide, Gap Inc. reduced its outlook for the year as first-quarter earnings and sales came in below expectations. Same-store sales at Old Navy declined for the first time in three years and the Gap brand posted its biggest decline since 2016.
Peck cited a litany of reasons for the disappointing results, including poor weather, slower traffic for stores, lower tax refunds for consumers and a decision to delay some marketing until later in the year.
“While traffic and sales trends improved as we moved through March and April, it was difficult to overcome the extremely slow business that we and others encountered in February,” Peck told analysts.
Among its major chains, same-store sales fell 10 percent at Gap Brand, 1 percent at Old Navy and 3 percent at Banana Republic. Net sales decreased 2.0 percent to $3.7 billion.
Boosted by a gain from the sale of a building, earnings rose to $227 million, or 60 cents a share, from $164 million, or 42 cents, a year ago. Excluding the gain, earnings declined 45.1 percent to $90 million, or 24 cents a share. Analysts expected 32 cents.
The poor results from Gap Brand led to some concerns about the planned spinoff of the Old Navy chain into a separate company.
“Compounding matters, timing couldn’t be more unfavorable, as this degree of slowing business prudently calls into question both the likelihood and valuation of the recently announced Old Navy spin-off,” wrote Wedbush in a note.
Peck said the company is on track to complete the separation in 2020 and a “project management office” has been formed to execute a smooth transition.
In its updated guidance for the year, Gap now expects:
- Net EPS in the range of $2.04 to $2.14, down from previous guidance of $2.11 to $2.26.
- Adjusted EPS in the range of $2.05 to $2.15, down from previous guidance of $2.40 to $2.55.
- Comparable sales to be down low single digits. Previously, comps were expected to come in flat to up slightly.
Photo courtesy Athleta