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Gap Misses Earnings Expectations, Suffers From Slowing Momentum

Though sales and earnings were up in the Gap Inc.’s first quarter, missteps at the Gap brand and slowing momentum for Old Navy disappointed.

In a Nutshell: TheGap brand weighed on gross margin in the first quarter, which was largely due to missed delivery schedules and over-assortment. While the company has addressed these issues, it says it expects some residual challenges in Q2.

At Banana Republic, the company said the brand is benefitting from exactly the assortment and inventory discipline that the Gap is in need of, resulting in positive momentum for the banner. Athleta continued its strong performance, turning in double digit growth for the quarter and prompting CEO Art Peck to call it a “gem.” At Old Navy, denim lead the brand with its biggest comp performance ever though comp sales slowed.

The company has affirmed its full-year guidance for diluted earnings per share to be between $2.55 and $2.70, with comp sales flat to up slightly. Additionally, Gap Inc. plans to net 25 new stores, primarily focused on Athleta and Old Navy. The latter brand is expected to pick up 60 new locations this year.

Sales: Gap Inc. reported a 10-percent increase in net sales for the first quarter, totaling $3.8 billion. The company noted foreign currency translations boosted this number by approximately $40 million.

Comp sales across the businesses were up 1 percent. Banana Republic turned in a positive 3 percent, while Gap comps dropped by 4 percent compared to the prior year period. Old Navy, which ended FY17 with 6 percent comp growth, only posted a 3 percent uptick for the quarter.

Earnings: Gap Inc. recorded a net income of $164 million, or 42 cents per diluted share, for the quarter, compared to $143 million, or 36 cents per diluted share, during the same period in 2017.

CEO’s Take: “We’re focused on growth in the active and value space. We continue to responsibly rationalize our store foot in specialty real estate. We are investing in our online and mobile channels, a business for us that is $3 billion and growing. We’re enhancing our productivity across the enterprise, and we’ll beginning to unlock the value of our customer data assets across brand and across channel. We’re well positioned on our unique and intrinsic strengths as a company, our scale, our platform and of course, our iconic brands,” Peck said during the company’s Q1 earnings call.