Gap Insists it is Making Progress Despite Declining Sales

The Gap Inc reported better-than-expected results, despite experiencing sales drops across all its brands and net losses in the fourth quarter.

This positive outcome was also observed in other retailers like Urban Outfitters Inc. (NASDAQ: URBN), Kohl’s Corporation, and Abercrombie & Fitch Co. that exceeded earnings expectations. Gap’s shares surged around 15% following the news, driven by improved gross margins.

This contrasts with Foot Locker, which faces challenges and must address major issues to avoid being overshadowed by the dominant apparel and footwear seller in the U.S., Amazon.com Inc.

In the first quarter, Gap reported a 6% year-over-year decline in revenue to $3.28 billion, with comparable sales across its four brands dropping by 3%, and store sales decreasing by 4% compared to the same quarter last year.

As sales return to pre-pandemic trends, online sales, which constituted 37% of total net sales, experienced a 9% YoY decline. Foot Locker Inc also highlighted the urgent need for an improved digital strategy as it competes not only with Amazon but also with brands that sell directly to consumers, such as Nike Inc.

However, when compared to the fiscal first quarter of 2019, Gap’s sales increased by an impressive 39%. Net loss narrowed from $162 million, or 44 cents per share, in the previous year’s comparable quarter to $18 million, or 5 cents per share. Adjusted earnings amounted to $3 million, or 1 cent per share.

Abercrombie & Fitch successfully transformed its brand identity, shifting from a “T-shirt and jeans” image to a lifestyle choice.

The apparel retailer exceeded analyst expectations, with net sales growing by 2.9% YoY to $836 million. Comparable sales for the brand increased by 14%. Abercrombie & Fitch expects full-year net sales growth between 2% and 4%, and the second quarter is off to a strong start.

Urban Outfitters effectively managed its supply chain, resulting in more stable margins. Unlike Foot Locker, which faced margin pressures due to promotions, Urban Outfitters controlled its promotions and saw a 2.6 percentage point increase in margins, driven by lower freight costs. Sales for the quarter ending on April 30th rose 6% YoY to $1.11 billion, and net income improved to $52.82 million, or 56 cents per share, compared to $31.53 million, or 33 cents per share, in the previous year’s comparable quarter.

While cost-cutting measures have contributed to Gap’s improved performance, the company needs to go beyond these measures to reposition itself for long-term growth, similar to Abercrombie & Fitch.

In a highly competitive landscape where Amazon leads the way without physical stores, Gap must focus on customer loyalty and make its brand image appealing to consumers’ lifestyles.

This task becomes more daunting considering Amazon’s empire and advanced algorithms that even disrupt the concept of personal style. Gap’s management acknowledges the need for critical change and is taking concrete actions such as conducting consumer research.

However, whether Gap can succeed in a world where Amazon continuously raises the bar remains to be seen.