Gap Sees Profitability Improving Following Holiday Sales Miss

(Bloomberg) -- Gap Inc. gave an optimistic projection for the current year, saying its strategic moves are starting to pay off, even though the apparel maker's fourth-quarter results missed estimates on several key measures. The shares rose in late trading.

For the current fiscal year, which ends in January, the retailer is projecting earnings per share in the range of $1.95 to $2.15, above the $1.68 average estimate from analysts surveyed by Bloomberg. It sees operating margin as high as 6.8%, also surpassing the average estimate.
Gap's overall same-store sales rose 3% in the quarter ended Jan. 29. That's below the average estimate of 4% from analysts surveyed by Bloomberg. Gross margin of 33.7% also fell short of expectations.
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Key Insights

Chief Executive Officer Sonia Syngal said that the company is addressing “near-term disruption from the acute headwinds that muted our fourth-quarter performance.” She added Gap is confident in its ability to execute its strategy, which includes investing to bolster customer-loyalty programs and using artificial intelligence to “accelerate profitable growth.”
Sportswear chain Athleta posted the strongest performance among Gap's portfolio of brands, and it's expected to meet its target of $2 billion in sales this fiscal year. Things weren't so pretty at Banana Republic and the Gap brand, however, with sales falling 11% and 13%, respectively, compared to 2019. Old Navy, plagued by supply-chain issues in the quarter, posted same-store sales that were flat compared to 2019, before the pandemic disrupted the company's business.
Last month, Gap moved forward with releasing products from its partnership with artist Kanye West. Executives have said that the line has already brought the retailer new first-time shoppers. Investors will be listening for more details on the upcoming call with analysts.
In an illustration of where the company's priorities lie, Gap plans to open about 30 to 40 stores for both Athleta and Old Navy this year. It also expects to shutter about 50 to 60 Gap and Banana Republic stores in North America.

Market Reaction

Gap shares rose as much as 12% in after-market trading on Thursday. The stock has fallen 19% this year through Thursday's close -- nearly twice as much as the the S&P Midcap Retailing Index.