GAP Reports Strong Q1 Results Amid Stock Drop

The Gap, Inc. (GAP) announced its first-quarter fiscal 2024 results, exceeding Zacks Consensus Estimates in both earnings and revenue, with year-over-year growth.

The quarterly performance reflected strong brand strength and increased market share. The company is focused on cost management and strategic initiatives, including enhancing operational efficiency and revitalizing its brand identities.

GAP’s earnings reached 51 cents per share, surpassing the Zacks Consensus estimate of 44 cents, marking a 24% increase from the previous year.

Net sales rose 2% year over year to $3.46 billion, exceeding the forecast of $3.42 billion. Comparable sales also grew 2%, driven by solid performances at Old Navy, Gap, and Banana Republic. Online sales increased by 6%, making up 39% of total sales, while store sales remained flat.

The Gap, Inc. Price, Consensus and EPS Surprise

The Gap, Inc. price-consensus-eps-surprise-chart | The Gap, Inc. Quote

Despite the positive earnings report, Gap’s shares fell over 15% in after-hours trading. The company anticipates gross costs of $250-$300 million due to existing tariffs, projecting a net impact of about $100-$150 million on operating income, particularly in the latter half of the fiscal year. Over the past six months, GAP’s shares have declined by 13.3%, compared to a 10.7% drop in the industry.

GAP’s Brand-Wise Sales & Comps Performance

Old Navy’s net sales increased by 3% year over year, reaching $2 billion, with comparable sales also rising by 3%. This marked nine consecutive quarters of market share gains, exceeding estimates of $1.9 billion.

Gap Global saw a 5% year-over-year sales increase to $724 million, with comparable sales improving by 5%, benefiting from brand revitalization efforts. Sales surpassed the anticipated $707.3 million.

Banana Republic’s net sales dipped 3% to $428 million, with flat comps, missing the projected $447.7 million.

Athleta’s net sales declined by 6% to $308 million, with comparable sales falling 8%, also below expectations of $332.3 million. The company continues to focus on brand improvement.

GAP’s Margins & Costs

The gross margin increased 60 basis points year over year to 41.8%, surpassing the estimated adjusted gross margin of 41.3%.

The merchandise margin remained flat due to effective inventory management, while rent and occupancy costs leveraged down 60 basis points.

The operating margin grew 140 basis points to 7.5%, exceeding the expected 6.4%. Operating expenses slightly decreased by 0.3% to $1.2 billion.

GAP’s Financial Health Snapshot

At the end of Q1, Gap reported cash and cash equivalents of $1.98 billion, up 29.4% from last year. The company had total stockholders’ equity of $3.3 billion and long-term debt of $1.5 billion.

Merchandise inventory rose 7.7% year over year to $2.1 million. Cash used in operating activities was $140 million, with negative free cash flow of $223 million. Gap paid $61 million in dividends and repurchased $70 million in shares during the quarter.

Capital expenditures for the quarter totaled $83 million, with an anticipated annual capex of $600 million. Gap operates about 3,500 stores globally, with 2,496 company-operated, anticipating around 35 closures this fiscal year.

What to Expect From GAP in Fiscal 2025?

Looking ahead, management expresses caution in navigating a volatile market for fiscal 2025, considering potential impacts on consumer behavior and broader economic conditions.

Gap projects sales growth of 1-2% from the $15.1 billion achieved in fiscal 2024, attributed primarily to Old Navy and Gap, with Banana Republic stabilizing and Athleta recovering slowly.

The gross margin is expected to increase slightly, driven by improved cost structure and leverage. Anticipated savings of about $150 million will be partly reinvested for growth. The operating income is forecasted to rise 8-10% from last year’s $1.11 billion, excluding tariff impacts.

Management estimates a net tariff impact of $100-$150 million this fiscal year. The effective tax rate is projected at approximately 26%, with net interest income expected to decrease to nearly $15 million from $25 million in fiscal 2024.

In Q2, net sales are expected to be flat year over year, reflecting the benefit from the previous year’s credit card agreement. The gross margin is likely to align with that of Q1.