Release Date: May 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Gap Inc (GPS, Financial) delivered a strong quarter with positive comparable sales across all brands, marking the fifth consecutive quarter of market share gains.
- Old Navy posted its highest quarterly comp in three years, driven by strength in the women's business and activewear.
- Gap brand saw double-digit growth in linen sales, showcasing successful product campaigns and collaborations.
- Athleta achieved a significant turnaround with a 5% increase in comparable sales, driven by new product innovations and limited edition drops.
- The company expanded its gross margin by approximately 400 basis points and maintained rigorous inventory discipline, ending the quarter with $1.7 billion in cash and equivalents.
Negative Points
- Despite positive results, Gap Inc (GPS) faces macroeconomic and geopolitical uncertainties that could impact future performance.
- Banana Republic, while showing improvement, is still early in its journey to reestablish itself in the premium lifestyle space.
- Athleta's second quarter net sales are expected to be down mid-single digits due to lapping last year's heavy discounting.
- The fourth quarter is anticipated to face a significant negative impact on sales due to the loss of a high-volume week, affecting gross margin due to ROD deleverage.
- SG&A expenses remain high, and while the company has made progress in cost reductions, there is still work to be done to achieve a more efficient cost structure.
Q & A Highlights
Q: As we look across the portfolio, what inning do you see each brand today in their respective reinvigoration timeline? How best to think about runway remaining to drive further same-store sales growth relative to first quarter's 3% comp?
A: (Richard Dickson, CEO) In the near term, we've outlined our four strategic priorities and are diligently focused on executing with excellence around them. We've seen good progress, giving us the confidence to raise our full-year guidance, which includes operating income growth in the mid-40% range versus last year. We will continue to make progress and revisit our mid and long-term views on the path to unlock the value of this extraordinary portfolio.
Q: Can you walk through the drivers of gross margin expansion in the second quarter and how best to think about the cadence in the back half of the year?
A: (Katrina O'Connell, CFO) The rigor we've developed is becoming core to how we operate, showing up in stronger financial foundations, better assortments, and tighter inventories. We now expect overall margin for the year to be up at least 150 basis points, with about 100 basis points from commodity recapture and modest improvements from better inventory management. For Q2, we expect margins to be up about 300 basis points, with 200 basis points from commodities and the balance from better inventory management.
Q: Are there opportunities for the brands within your portfolio to share information around how products are selling, like the linen campaign?
A: (Richard Dickson, CEO) Yes, this is part of our brand reinvigoration playbook. We are developing more trend-right product assortments with a clear point of view and creating better omnichannel experiences. The linen campaign is a good example of executing with excellence at every touchpoint. Zach Posen's influence is also showing up across various brands, contributing to our creative culture.
Q: Can you talk about the strong merchandise margin improvement and how stores performed versus e-commerce?
A: (Katrina O'Connell, CFO) We saw good merchandise margin expansion in the quarter, driven by better inventory management and commodity recapture. We don't provide margins by brand, but we will continue to use rigor across all brands to deliver overall margin expansion. Inventory levels are now managed to ensure stock-to-sales ratios that allow us to be more responsive to consumer trends.
Q: What are your focus areas in 2Q versus the rest of the year? Any KPIs you are most focused on?
A: (Richard Dickson, CEO) My priorities remain consistent: operating and financial rigor, reinvigoration of our brands, evolution of our operating platform, and reviving our culture. Metrics and measures are linked to these priorities. The fact that all four brands comped for the first time in history is a strong indication that our playbook is taking shape. We will keep you updated on our progress.
Q: Can you provide additional context on the marketing and product initiatives for Old Navy that give you confidence in continued comp growth?
A: (Richard Dickson, CEO) Marketing today is more complex, and our brands need to show up where consumers are in relevant ways. Old Navy has been delivering consistently with strong sales and comps. The current campaign featuring Tracy Ellis Ross and Yara Shahidi is an example of effective storytelling. We are confident and excited about our work and the initiatives coming in the back half.
Q: How are you thinking about pricing and promo for the rest of the year at Old Navy and across the portfolio?
A: (Richard Dickson, CEO) It's about pricing communication rather than strategy. We need a balanced promotional strategy and have been reinforcing value by communicating with clarity on price and quality. Our signing packages and WOW prices are strategically well thought through, and we are encouraged by the progress and results.
Q: Are there any bigger picture initiatives you have your eyes on that you haven't addressed yet?
A: (Richard Dickson, CEO) We continue to focus on our four priorities, but one bigger initiative is strengthening our platform. Our supply chain provides unique cost leverage, but we need to accelerate innovation. We are also focusing on media and marketing, and technology to drive value and solve problems. These areas offer significant opportunities for efficiency and effectiveness.
Q: Are you seeing higher customer acquisition at Gap with new collaborations and cultural resonance? What is your strategy to retain these customers?
A: (Richard Dickson, CEO) Gap is showing up in the cultural conversation with collaborations driving both relevance and revenue. Successful brand reinvigoration combines both. Athleta is also becoming part of the cultural conversation, empowering women and girls through the Power of She collective. These efforts are part of our playbook to drive relevance and revenue.
Q: How are you thinking about merchandise margin drivers in the back half and beyond?
A: (Katrina O'Connell, CFO) We don't want to get too far ahead of ourselves. Our outlook implies a return to historically high gross margins for the company, driven by inventory management, commodity recapture, and higher AURs. We will take it one quarter at a time and aim to outperform where possible.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
