Gap shares rise after retailer issues strong earnings guidance, despite weak revenue outlook

Gap Inc. shares climbed in after-hours trading Thursday after the apparel retailer offered an upbeat forecast for its profits in 2022, in spite of rising inflation and logistics challenges.

Supply chain snarls remain a headache for the retailer, which also owns the Banana Republic and Old Navy brands, but the company said it expects shipping issues to improve. Gap Chief Executive Sonia Syngal said in a press release that the retailer faced near-term disruptions during its fiscal fourth quarter that “muted” overall performance.

Sales in the holiday period came in below pre-pandemic levels, and Gap sees its first-quarter revenue declining more than analysts had anticipated, on a year-over-year basis. Still, investors sent shares higher Thursday evening as they made a longer-term bet on the apparel company’s improvements and on more American consumers looking to refresh their wardrobes.

The comments from Gap about its first quarter outlook echo a shared sentiment among other apparel retailers, including American Eagle Outfitters, Abercrombie & Fitch, Urban Outfitters and Victoria’s Secret, which are facing headwinds from sky-high inflation to a lingering labor crunch to global unrest spurred by Russia’s invasion of Ukraine.

Each of these companies spoke this week to recent troubles securing merchandise over the holiday season due to supply chain constraints. They also cautioned that pressures related to shipping and rising prices will persist at least through the first half of the year. But then they expect to turn a corner, as evidenced by Gap’s annual forecast.

In the first quarter, though, Gap sees revenue contracting by a mid-to-high single-digit rate compared with the prior year. Analysts had been looking for a smaller 3.8% drop.

Here’s how Gap did in its fourth quarter compared with what Wall Street was anticipating, according to a survey of analysts by Refinitiv:

• Loss per share: 2 cents adjusted vs. 14 cents expected
• Revenue: $4.53 billion vs. $4.49 billion expected

Gap swung to a loss in the three-month period ended Jan. 29 of $16 million, or 4 cents per share, compared with net income of $234 million, or 61 cents a share, a year earlier.

Excluding charges related to strategic changes in its European business, Gap lost 2 cents a share, which was narrower than the 14-cent loss that analysts had been looking for, according to Refinitiv data.

Revenue grew about 2% to $4.53 billion from $4.42 billion a year earlier. That beat estimates for $4.49 billion. Compared with 2019 levels, however, Gap said its sales were down 3%. That was partially due to ongoing and planned store closures.

Same-store sales — a key metric that tracks revenue at retail stores open for at least 12 months — grew 3% year over year, short of the 3.7% increase that analysts had been looking for. On a two-year basis, same-store sales were also up 3%.

Gap said its gross margins contracted to 33.7% in the fourth quarter, falling short of analysts’ estimates for 35.2%, according to StreetAccount. Gap said the metric was pressured by higher air freight costs, which were partially offset thanks to the company selling more hoodies and denim at full price points.

Here’s a sales breakdown, by brand:

• Gap said Old Navy was hurt in part due to supply chain complications, with same-store sales flat compared with 2019.
• At Gap’s namesake banner, same-store sales climbed 3% on a two-year basis, fueled by double-digit growth in North America. The company said the brand is poised to grow in the coming months thanks to a recent tie-up with Walmart for home goods, as well as its collaboration with rapper Kanye West.
• Banana Republic same-store sales dropped 2% from 2019 levels, in part due to ongoing store closures, the company said.
• Same-store sales at Athleta, Gap’s growing athletic apparel line for women, surged 42% on a two-year basis. The company said Athleta is still on track to hit $2 billion in annual sales by 2023.

During a post-earnings conference call, Syngal, the CEO, told analysts that Gap expects delivery times of inventory shipments to improve as the retailer diversifies its port exposure. She said the retailer has shifted business to Eastern and Southern ports, which are seeing materially better performance than those on the West Coast.

“We have undertaken significant restructuring necessary to become a more nimble and focused company,” she said on the call.

The retailer said it expects inventories to grow in the mid-20% range by the end of the first quarter, compared with a year ago, due to it booking merchandise orders earlier than normal in order to try to offset longer transportation timeframes.

Management touted the strength of the namesake Gap brand, a turnaround shaping up at Banana Republic and the continued momentum at Athleta. Old Navy, which had been a core growth driver for the company in recent years, should correct as the shipping challenges ease, the company said.

“We still have a firm conviction in our ability to grow our core brands,” said Gap Chief Financial Officer Katrina O’Connell. “Our primary focus is on the long-term health of the business.”

For the full year, Gap expects to earn between $1.85 and $2.05 per share, on an adjusted basis, with sales growing a low single digit percentage from 2021. Analysts were projecting annual adjusted per-share earnings of $1.86, with sales up 1.6% from prior-year levels.

O’Connell said Gap expects to spend about 25% less on air freight expenses in 2022, too, compared with the roughly $430 million it shelled out to move goods in the air from overseas in 2021. A little more than half of those expenses will be realized in the first quarter, she said.

Gap shares are down about 45% over the past 12 months, as of Thursday’s market close. The company has a market value of $5.3 billion.

Find the full financial press release from Gap here.