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Gap Shares Dip as Old Navy’s Weak Performance Leads to Lowered Sales Outlook

Gap Inc. reported mixed Q1 results, missing revenue expectations as Old Navy’s performance lagged. The company lowered its full-year sales outlook but raised its earnings per share guidance.

Flavor News Editorial Desk 4 min read
An Old Navy store is seen in this file photo. Gap Inc. reported mixed fiscal first-quarter results, with its largest brand Old Navy missing sales expectations.
An Old Navy store is seen in this file photo. Gap Inc. reported mixed fiscal first-quarter results, with its largest brand Old Navy missing sales expectations.

Market impact

Gap's Q1 results highlight significant underperformance at Old Navy, impacting the company's overall sales outlook despite improved earnings guidance.

Why it matters: The mixed results and lowered sales guidance from Gap, particularly due to weakness at its largest brand Old Navy, indicate potential consumer spending shifts and challenges in apparel assortment relevance, affecting the retail sector.

Key numbers

  • 1% comparable sales growth at Old Navy
  • 3% comparable sales growth expected by analysts
  • 1% to 2% companywide sales growth forecast
  • 2% to 3% prior sales growth forecast
  • $2.30 to $2.40 adjusted EPS guidance
  • $2.20 to $2.35 prior EPS guidance
  • 10% stock drop in extended trading
  • 38 cents adjusted EPS

Watch next

  • Consumer spending trends
  • Apparel assortment success
  • Retail sector performance
  • Gap's turnaround strategy
Retail Apparel Gap Inc. Old Navy Banana Republic Athleta

Gap Inc. reported mixed fiscal first-quarter results on Thursday, missing revenue expectations while surpassing earnings estimates. The company's largest brand, Old Navy, experienced sales that were weaker than anticipated, prompting Gap to revise its full-year sales guidance downward.

CEO Richard Dickson informed CNBC that the spring and summer collections at Old Navy did not resonate with shoppers, a key factor in the reduced sales outlook. "It's not a consumer issue," Dickson stated. "We're winning with all income cohorts across low, middle, and high. When you have the right product at the right price value equation, customers are there, and our seasonal categories just got off to a weaker start."

During the first quarter, Old Navy's comparable sales increased by 1%, falling short of the 3% growth analysts had projected, according to StreetAccount. This underperformance contributed to Gap's decision to lower its companywide sales growth forecast to a range of 1% to 2%, down from its previous projection of 2% to 3% growth.

Despite the lowered sales guidance, Gap raised its adjusted earnings per share (EPS) forecast for the full year. The company now anticipates adjusted EPS to be between $2.30 and $2.40, an improvement from the prior range of $2.20 to $2.35. Gap's stock experienced a decline of over 10% in after-hours trading following the release of these results.

Dickson highlighted specific categories within Old Navy where sales were particularly soft, noting weakness in dresses and swimming shorts. Conversely, the activewear, denim, and children's categories showed strength.

For the fiscal first quarter, Gap reported adjusted earnings per share of 38 cents, exceeding the 37 cents expected by Wall Street analysts. Revenue for the period, which ended May 2, reached $3.50 billion, slightly below the $3.52 billion anticipated by analysts.

Overall net income for the quarter was $339 million, or 90 cents per share, a significant increase from $193 million, or 51 cents per share, in the same period a year prior. Excluding one-time items, such as a substantial legal settlement, Gap's adjusted EPS stood at 38 cents.

Chief Financial Officer Katrina O'Connell attributed the improved earnings forecast to favorable tax rates and increased interest income. The company also anticipates an $80 million benefit from reduced tariff rates, though this amount was not included in the current guidance and is being held in reserve. Half of this reserve is earmarked for potential increases in fuel prices, while the remainder is set aside for possible promotional activities aimed at stimulating demand.

Performance varied across Gap's brands:

Brand Performance Highlights

**Gap:** The company's namesake brand saw a remarkable 10% increase in comparable sales, significantly outperforming the 5.5% growth expected by analysts. Overall sales for the Gap brand also grew by 10%, reaching $796 million, driven by effective marketing and a stronger presence in key categories like denim, fleece, and children's apparel.

**Banana Republic:** This workwear-focused brand reported comparable sales growth of 2%, falling short of the 4% analysts had projected. Despite this, overall sales for Banana Republic increased by 1% to $431 million, marking the fourth consecutive quarter of positive comparable sales for the brand. Earlier in the month, Gap announced Donald Kohler, former CEO of PVH Americas, as the new CEO of Banana Republic.

**Athleta:** Gap's athleisure brand continued to face challenges, with comparable sales declining by 11% and overall sales falling by 12%. New CEO Maggie Gauger, who joined from Nike, is working to streamline the brand's offerings, and Dickson expressed optimism for some improvement in the latter half of the year.

**Old Navy:** As previously noted, Old Navy's sales grew by 1% to $2 billion, with comparable sales also up 1%, a performance considered worse than expected.

Dickson concluded by emphasizing the importance of delivering the right product to consumers, stating, "It's in the hands of the consumer. We've just got to deliver that to them, and then we'll see how they respond."