Hole (GPS) income Q3 2022

Holiday shoppers participate in early Black Friday shopping deals at the Gap store in Times Square in New York.

Brendan McDermid | Reuters

gap on Thursday beat Wall Street’s quarterly sales expectations but gave a cautious outlook ahead of the holiday season.

The apparel retailer — which also owns its namesake brands Banana Republic and Athleta — said it expects its total net sales for the fourth quarter of fiscal 2022 could decline by a mid-single-digit rate from a year earlier.

Chief Financial Officer Katrina O’Connell said while the company has made progress in reducing its bloated inventories, it will “continue to take a prudent approach given the uncertain consumer and increasing advertising environment as we look to the remainder of fiscal 2022.”

Shares of the company rose about 6% in extended trading on Thursday.

Here’s how the retailer performed over the three months ended October 29:

  • Earnings per share: Adjusted 71 cents
  • Revenue: $4.04 billion versus $3.8 billion expected, according to Refinitiv consensus estimates.

Wall Street expected Gap to break even per share, but it wasn’t immediately clear whether reported earnings per share were comparable to estimates.

Gap’s net income rose to $282 million, or 77 cents a share on an unadjusted basis, a dramatic improvement over a net loss of $152 million, or 40 cents a share, in the year-ago period. Revenue increased 2% to $4.04 billion from $3.94 billion in the same quarter of 2021.

Comparable sales for the entire company, which tracks sales online and in stores open for at least 12 months, increased 1% compared to the year-ago period. Analysts had expected comparable sales to fall 3.2%, according to StreetAccount estimates.

Here’s a closer look at each area:

  • Gap’s eponymous brand, known for denim and basics: Comparable sales increased 4% worldwide and were flat in North America. The company said it was in better shape with inventory but had weaker sales in the kids and babies categories.
  • Old Navy, known for casual wear for adults and children: Comparable sales decreased 1%. The brand saw weaker demand for baby and children’s clothing and was hurt by low-income consumers who felt overwhelmed by inflation.
  • Banana Republic, known as a suit and dress destination: Comparable sales increased 10%. It’s looking for a new direction after the pandemic disrupted the typical fashion routine – leading to more people working from home a few days a week and dressing more casually on the days they go to the office.
  • Athleta, an activewear brand: Comparable sales were flat as shoppers shifted towards buying more occasion and work outfits. The store comes at a time when Americans are eagerly stocking up on stretchy leggings, workout tops and other comfy loungewear when spending time at home.

Gap withdrew its full-year forecast in August, citing company-specific issues as well as inflation and a tougher economy.

The company is looking for a new CEO after Sonia Syngal left this summer and played a high-profile split from Ye’s brand Yeezy. Ye, formerly of Kanye West, terminated his contract with Gap in September citing what he called breaches of contract and a lack of creative control. Gap removed all Yeezy products from its stores in late October after West made public anti-Semitic remarks.

Gap announced Thursday that it had incurred $53 million in impairments related to Yeezy Gap.

The retailer is also grappling with an oversupply of clothes that are out of season, out of style or the wrong size, in addition to high inflation and lower consumer sentiment.

Bloated inventories have become an issue for many retailers, including Gap. A year ago, Gap struggled to keep up with demand as factories were temporarily closed due to Covid and goods were stuck in congested ports. The retailer even went so far as to pay extra to have clothes flown in by air. But delays and backlogs meant some seasonal goods were still late arriving.

Inventories have been piling up over the past few quarters as consumers seek smarter clothing rather than casual wear. Gap’s inventories rose 34% in the first quarter and 37% in the second quarter. Gap has turned to packing and storing excess inventory to relieve stores that are clogged with the wrong stuff. But it was also forced to offer deep discounts, which hurt profits.

At the end of the third quarter, Gap said Thursday inventories were up 12%.

Old Navy faced a more specific inventory problem: the division decided to offer more plus-size women’s clothing, but the move ended up leaving stores with too many extended sizes and not enough popular sizes. Gap said Thursday that Old Navy made progress improving size balance in the third quarter, which boosted sales.

Share of gap is down 27% so far this year. Shares closed at $12.72 on Thursday, up more than 5% during the session.

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