Gap’s Stock Jumps on Surprise Q1 Profit

Words by Retail Bum

Gap Surprises with Profitability
Gap Surprises with Profitability

Apparel retailer Gap pleasantly surprised investors by announcing an unexpected profit for the first quarter, leading to a 16% surge in its shares during extended trading.

The company attributed this positive outcome to its ongoing restructuring initiatives and efforts to alleviate supply chain costs.

Lower air freight expenses and enhanced promotional activity played a significant role in Gap’s adjusted quarterly merchandise margin, which saw a substantial increase of 610 basis points.

Gap’s efforts to address surplus inventory also paid off, with inventory levels down by 27% compared to the previous year, according to Chief Financial Officer Katrina O’Connell.

The company was previously dealing with excess inventory as it had accelerated its ordering process during the COVID-19 pandemic to keep up with heightened consumer demand. However, as spending patterns returned to normal, the company faced excess inventory that remained unsold.

“It was a decent quarter that surpassed expectations and alleviated concerns,” said CFRA Research Analyst Zachary Warring.

Over the past few months, the retailer has undertaken two rounds of layoffs, eliminating approximately 2,300 corporate positions. The move aligns the company with other major U.S. corporations that are actively downsizing in response to significant pressure on consumers’ wallets caused by high inflation.

During an earnings call, interim CEO Bob Martin stated that the job cuts are expected to generate approximately $550 million in estimated annualized savings when viewed cumulatively.

Despite efforts to refresh inventory and align with consumer trends, sales for all four of Gap’s brands declined during the quarter. The retailer faced challenges in effectively updating its product offerings to meet the evolving demands of consumers.

Similar to notable retailers like Target and Best Buy, Gap is also experiencing declining demand as lower- and mid-income consumers have cut back on their discretionary spending.

According to Refinitiv IBES data, Gap announced an adjusted profit of 1 cent for the first quarter, surpassing estimates that predicted a loss of 16 cents. However, the company experienced a 6% decline in net sales, amounting to $3.28 billion, slightly below analysts’ expectations of $3.29 billion.

Gap has maintained its annual sales forecast and anticipates second-quarter sales to decrease in the mid-to-high-single-digit range. On average, analysts are predicting a 4.95% decline in second-quarter sales.

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