Gap Jumps as Old Navy Strength Fuels Optimism for Rebound

(Bloomberg) -- Gap Inc.'s Old Navy brand is giving investors reason to believe the apparel retailer remains relevant, even if the company's namesake stores are still looking for a boost.

Comparable-store sales increased 9 percent at the discount chain -- almost triple the estimate from Consensus Metrix. This caused shares to jump. Sales at Banana Republic and the Gap brand, while more moderate, also outpaced expectations.

The apparel retailer has been working to leverage the ongoing success of Old Navy into gains at its other chains, most notably a flagship Gap brand that has stumbled with fashion misses and deep discounts. As mall traffic dwindles, Chief Executive Officer Art Peck is looking to bolster online sales and find more ways to cut costs.

Profit excluding some items was 61 cents a share in the quarter ended Jan. 28, the company said on Thursday. That's higher than analysts' average projection of 59 cents. For the coming fiscal year, earnings will be $2.55 to $2.70 a share, outpacing analysts' average estimate of $2.41.

The company forecast comparable sales will be flat or up slightly for the full fiscal year.

The shares rose as much as 7.9 percent to $34.19 in New York. The stock surged 52 percent in 2017, mostly on the success of Old Navy.

Same-store sales at Old Navy had been estimated at 3.4 percent by Consensus Metrix. Banana Republic sales climbed 1 percent by the same measure, versus an estimate for a 2.3 percent decline. Gap sales were flat, while analysts had forecast a decline of 0.5 percent.

Timing Issues

Sales at the flagship brand were disappointing last quarter, Peck said on a conference call. While customer traffic improved, problems managing inventory led to products being delivered to stores later than planned, he said. Gap is implementing a fix, but the brand will likely have to mark down prices through at least the first half of the year until the timing is corrected.  

Last month, Gap said it will seek new leadership for the brand and Jeff Kirwan, president and chief executive officer of the Gap brand, will leave the company. In the interim, Brent Hyder, executive vice president of global talent and sustainability, will oversee the unit.

Still, Peck is optimistic Gap can win over younger consumers in the long term.

“The fascinating thing about Gap brand is that many millennials haven't experienced Gap brand except when they were kids and their parents were dressing them in Gap brand clothing, and yet there was a very positive orientation towards the brand,” Peck said.

To contact the reporter on this story: Lindsey Rupp in New York at lrupp2@bloomberg.net.

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Jonathan Roeder

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