Old Navy is humming along, and Gap Inc. aims to replicate the brand’s success across its other formats.
As a strong dollar and the lingering effects of a West Coast ports shutdown weighed down the retailer’s first-quarter results, sales at the 1,000-plus Old Navy stores helped offset the declines.
Art Peck, chief executive officer, said the success of Old Navy will be the playbook used to turn around Gap and Banana Republic – especially in those brands’ women’s wear businesses. Management also reaffirmed full-year earnings as the company gears up for product launches from its collaborations with Derek Lam 10 Crosby and Ellen DeGeneres’ ED lifestyle brand later this summer.
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For the first quarter, the specialty retailer posted an 8 percent decline in net income to $239 million, or 56 cents a share, from $260 million, or 58 cents, in the same period last year. As previously reported, sales at the specialty retailer fell 3 percent to $3.66 billion from $3.77 billion in the prior year. The retailer said total online sales fell 2.1 percent to $563 million from $575 million in the same period last year.
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Results were released after market. Shares of Gap closed down 0.3 percent on Thursday to $38.56. In after-hours trading, the stock was down 0.03 percent to $38.55. Trading volume was heavier than the stock’s average. The 52-week high is $46.85 and the low is $35.46.
During the quarter, Old Navy outperformed the retailer’s other retail brands with a 3 percent same-store sales gain. Earnings per share were in line with analysts’ consensus estimates.
On his second earnings call as ceo, Peck said the company had “an exceptionally well-performing women’s business at Old Navy, which has driven great, profitable growth. Product acceptance at Gap and the women’s business has been tough, and we’re focused on making it happen. And at Banana Republic, it’s a work in process, and we have work to do there as well.”
But the ceo focused on Old Navy as a cure to aid its other brands. “[Old Navy has had] three years of excellent performance, and most importantly, underneath the covers, growth that is being driven in a very high-quality way with a very nice margin story underneath it,” Peck said adding the same-store sales increase at Old Navy was a “women’s wear story.”
“And I’m saying that in particular because as we have struggled with our women’s business in Gap,” Peck explained. “Old Navy is an excellent example where we continue to get women’s right season after season, and we are very pleased with the performance that we are seeing with on-brand, on-trend product in our stores.”
The formula for success, Peck said, was a combination of a “a team working well together” as well as “process changes.” Peck said the company is “taking these changes – and in some cases – largely transplanting them into our other businesses in that they are proven inside of Old Navy and they have been delivering this kind of performance.”
By way of outlook, management reaffirmed full-year earnings per share guidance to be between $2.75 and $2.80 per share.
Old Navy’s 3 percent same-store sales gain compares to a 1 percent increase for the same period last year. The Gap brand posted a 10 percent same-store sales decline during the quarter, which compares to a 5 percent drop last year. Banana Republic fell 8 percent, which compares to a 1 percent decline in same-store sales last year.
Regarding the impact of a strong U.S. dollar, the company said in its report that the “translation of net sales in foreign currencies into U.S. dollars negatively impacted the company’s reported sales for the first quarter of fiscal-year 2015 by about $90 million, primarily due to the weakening Japanese yen and Canadian dollar.”
As for the West Coast ports shutdowns, the retailer said net sales were negatively affected “by delayed merchandise receipts.” Carving out the impact of currency translations, the retailer said net sales for the quarter would have resulted in a 1 percent decline.
The retailer posted operating expenses that fell 2.4 percent to $996 million from $1.02 billion in the prior year. Marketing expenses also declined – falling $7 million to $136 million. The operating margin came in at 10.6 percent, which compares to 11.7 percent in the same period last year. The company also said its “inventory dollars per store” metric showed a 4 percent gain in the quarter.
Additionally, the retailer is on track with its capital expenditures plan for the year. It expects to spend about $800 million, and said the first-quarter spending came in at $150 million. At the close of the quarter, the company had 3,749 units in 51 countries. The number of company-operated stores was 3,309. The retailer opened 50 units and closed 21 company-owned units.
As previously reported, the retailer is planning a September launch of goods developed from a partnership with Derek Lam 10 Crosby for its Athleta brand. The merchandise is a contemporary line aimed at leveraging the “athleisure” market. Also on deck is the rollout of GapKids x ED, which is an apparel collection being done in partnership with Ellen DeGeneres’ ED line. The launch is set for August via GapKids stores as well as on Gap.com.