Gap Inc. said its Athleta chain continued to deliver healthy positive comp gains in the third quarter, led a strong performance by its newer girls offerings during the back-to-school season.
“It remains a growth engine in the portfolio,” said Art Peck, president and CEO of Gap, about Athleta on a conference call with analysts. “During the third quarter, 95 percent of the Athleta business comped positively demonstrating the underlying health of the business.”
The performance was helped by a break-out performance for girls.
Athleta launched athleisure for girls ages 6 to 14 in April 2016. Said Peck, “Last quarter I mentioned that the girl’s business was going to come out and seriously play in the back-to-school space and it did not disappoint with an over 60 comp in that business. The brand continues to see solid growth in its customer file, specifically new customers and is on track to exceed its 2018 customer acquisition goals.”
Peck also talked up the the prospects for Hill City , its first men’s active brand that launched in October.
Said Peck, “It is very early days, so I won’t spend a great deal of time on the call about the brand but the $22 billion performance lifestyle space is growing and is a key pillar of our balanced growth strategy,” said Peck. “We saw white space opportunities for men’s premium performance active brand and paired that opportunity with our operating platform, our size, our scale and our talent. Early product feedback has been positive.
“Customer engagement has been very strong and we’re taking advantage of the millions of visitors coming to our e-commerce platform to expose the brand to new eyeballs. We brought Hill City to life in little over a year with a team of less than 20, something that would simply not be possible without the advantage of the underlying Gap, Inc. platform and customer base.”
Companywide, earnings rose 16.2 percent to $266 million, or 69 cents a share, topped Wall Street’s consensus target of 68 cents.
Revenues grew 6.5 percent to $4.09 billion, exceeding consensus targets of $3.98 billion. Excluding the presentation changes from the adoption of the new revenue recognition standard, net sales increased 2 percent.
Among other chains, comps at Old Navy and Banana Republic were up 4 percent and 2 percent, respectively, while the Gap brand’s comps fell 7 percent.
Gross margin was 39.7 percent, flat compared with last year. Excluding the impact of presentation changes from the adoption of the new revenue recognition standard, gross margin was 38.1 percent, a decrease of 160 basis points compared with last year, largely driven by an increase in shipping expenses and elevated promotional activity at Gap brand.
The big news was that Peck indicated that the company planned to ramp-up closures of the underperforming flagship chain.
Peck said that should the company “address” the bottom half of its fleet of Gap stores, it could contribute more than $100 million to earnings. He added the company is looking to make decisions about shutting stores “with urgency,” including looking at closing some of Gap’s “amazing flagships.”
“There likely will be a cash cost to exit many of these stores, which we will attempt to minimize…” Peck told analysts. “But I plan to exit those that do not fit the future vision quickly. I’m going to move thoughtfully but aggressively.”
Peck said active business at the Gap chain “kind of chugs along” with the weakness at the chain primarily coming from weakness in its women’s range.
For the full year, Gap narrowed its EPS guidance range to $2.55 to $2.60, compared with previous guidance of $2.55 to $2.70. The company continues to expect comparable sales for fiscal year 2018 to be flat to up slightly.
Image courtesy Athleta
