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Old Navy regains momentum in Q3 as Gap Inc. shows signs of recovery

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Dive Brief:

  • Gap Inc. Q3 net sales fell 6.7% year over year to $3.8 billion, with comps down 2%. Store sales fell 6% and online sales (which were 38% of total net sales) fell 8%.

  • By brand, Old Navy net sales fell 1% to $2.13 billion, with comps up 1%; Banana Republic fell 11% to $460 million, with comps down 8%; and Athleta fell 18% to $279 million, with comps down 19%. Namesake Gap net sales fell 15% to $887 million, with comps down 1%. Taking out the sale of Gap China and the Yeezy Gap shutdown, net sales fell 6%.

  • Gross margin in the period expanded 390 basis points year over year to 41.3%. Inventory was down 22% at quarter’s end. Net income fell 22.7% to $218 million.

Dive Insight:

Gap’s third quarter delivered quite a few declines, from across the portfolio, but all brands also seem to be on the mend to some extent.

“Overall, we are more optimistic about Gap now than we have been in a long time,” GlobalData Managing Director Neil Saunders said in emailed comments. 

Newly arrived Gap Inc. CEO Richard Dickson noted progress at Old Navy and Gap in particular, but said there is more work to be done in merchandising and marketing across the board. Gap’s brand awareness remains high despite slipping out of cultural relevance in recent years, he said on a conference call with analysts.

“The Gap brand as you know has tremendous heritage as a pop culture brand that delivers, leads trends, celebrates individuality and self-expression,” he said. “But lately, Gap has been far too quiet in the cultural conversation. We need to reignite that dialogue, offering confident, trend-right assortments, priced right, and expressed through big ideas and culturally relevant messaging.”

Executives and analysts alike noted momentum at Old Navy, which is the company’s largest business and the number two specialty apparel retailer in the U.S. The brand eked out positive comps for the first time in two years, with strength in women’s and children’s and tailwinds from the back-to-school season, according to Wells Fargo analysts led by Ike Boruchow. Comparisons will get easier and “the brand should maintain momentum,” they said.

“The brand gained market share within its segment as on-trend product assortment and omni-channel messaging improved with a cost-conscious consumer turning to the value-oriented brand,” they said.

But Old Navy still faces risks in maintaining its past growth and margin rates as competition rises, according to Jefferies analysts led by Corey Tarlowe. Slowing trends there, the source of 60% of revenue and “even more of profit,” will be in focus, they said.

Athleta and Banana Republic have the furthest to go in terms of recapturing sales, Chief Financial Officer Katrina O’Connell said. For Athleta it means taking advantage of the massive opportunity in its activewear and athleisure niche, according to Saunders. For Banana Republic it means successfully “repositioning to a more premium lifestyle brand,” he said.

“The challenge will be for Banana to emerge from this process as a smaller but more profitable and more stable brand,” he said. “Whether the company can pull this off remains to be seen.”

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