Dive Brief:
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Gap Inc. on Thursday said Q2 net sales rose 4.8% year over year to $3.7 billion, with comps up 3%. Store sales rose 4% and online sales rose 7%, reaching 33% of total net sales.
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Old Navy net sales rose 8% to $2.1 billion, with comps up 5%; Gap net sales rose 1% to $766 million, with comps up 3%; Banana Republic net sales were flat at $479 million, with comps also flat; and Athleta net sales fell 1% to $338 million, with comps down 4%.
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Gross margin expanded by 500 basis points to 42.6%, and merchandise margin expanded by 410 basis points. Net income soared 76% to $206 million.
Dive Insight:
Gap Inc.’s Q2 performance indicates that the company is once again gaining market share in apparel, according to many analysts and the company itself.
“We're running a fundamentally stronger business,” CEO Richard Dickson said Thursday.
The turnaround is especially evident at Old Navy, which in recent years had begun to post uncharacteristic declines, but all brands are making headway in their respective turnarounds, Dickson said. Athleta is set to return to positive comps in the second half of the year, and the company is “focused on reestablishing [Banana Republic] to thrive in the premium lifestyle space” and has made assessments around assortment, price and operations even as it continues to search for a new CEO, he said. Sandra Stangl exited the post earlier this year.
The reversal of fortune may be most profound at Gap, which had ceded its place in the cultural conversation but whose merchandise and marketing, according to Dickson, are regaining attention from consumers of all generations. The brand recently enlisted singer-dancer and Gen Z favorite Troye Sivan and Dutch dance troupe CDK Company for its campaign around its loose denim fits. Collaborations are resonating with both loyal (Dôen) and new (Madhappy) customers, and will continue to be an important mechanism for the brand, Dickson said.
“Gap has broken the habit of being a company in permanent decline,” GlobalData Managing Director Neil Saunders said in emailed comments, adding, though, that store improvements aren’t as evident at Gap as they are at Old Navy. “There is still a lot more work to do to refine and elevate the overall proposition and carve out a more distinct identity. However, from our discussions with management, this is something they are conscious of, and we are confident that it is part of the future playbook.”
Indeed, while the business may be stronger, it’s not clear that it can maintain its current momentum, given that difficult year-on-year comparisons and freight costs increases are looming, according to Bank of America analyst Lorraine Hutchinson.
Dickson said the company is still optimizing its real estate footprint and improving its store merchandising.
“There's a lot of work that we're doing to understand productivity, store experiences, traffic and all the variables,” he said, including balancing “bricks and mortar and digital and the connection between the two. ... We have a lot of work to do across our fleets to make sure that these stores reflect the brand reinvigoration that we've been working on.”
Wells Fargo analysts led by Ike Boruchow professed some confidence in the staying power of Gap Inc.’s turnaround, noting that it’s posted consecutive quarters of comp growth above 3% for the first time in seven years, its margins are closer to the more robust levels of the pre-COVID era, and executives see positive comps and gross margin expansion continuing, despite the tough comparisons and worries about a drooping economy.
“While fears of an eventual breakdown in the story continue to pop-up, 2Q again showed us that the turnaround has legs — with a 4th straight material bottom-line beat/raise,” Boruchow said in a Thursday client note. “Visibility appears higher than many give them credit for.”
