Gap posts Q2 profit but sales decline 8 percent

Net sales at Gap Inc. of 3.55 billion dollars, were down 8 percent compared to last year, while comparable sales were down 6 percent.

Reported net income was 117 million dollars; while reported diluted earnings per share were 32 cents. The company reported adjusted net income of 127 million dollars, and adjusted diluted earnings per share were 34 cents.

"I have long admired Gap Inc. as a customer, a brand builder, and most recently, as a board member. An even greater draw is the company's storied brands. And I'm excited for the opportunity to lead the incredible people of Gap Inc. to unlock our full potential," said Richard Dickson, president and chief executive officer, Gap Inc.

"We're seeing encouraging signs of progress, as our teams streamline the way we work so we can focus on growth-driving initiatives – a virtuous cycle that we'll look to become our norm," added Dickson.

Highlights of Gap’s Q2 performance

The company's store sales for the quarter decreased 7 percent compared to last year. The company ended the quarter with 3,456 store locations in over 40 countries, of which 2,592 were company operated.

Online sales decreased 11 percent compared to last year and represented 33 percent of total net sales.

The company’s gross margin of 37.6 percent increased 310 basis points versus last year's reported gross margin and increased 160 basis points. Reported operating income was 106 million dollars; while reported operating margin was 3 percent.

The company reported adjusted operating income of 119 million dollars and adjusted operating margin of 3.4 percent.

Review of core brands under Gap portfolio

Old Navy net sales of 1.96 billion dollars were down 6 percent, while comparable sales were down 6 percent. The company said that strength in women's tops and woven bottoms and improved trends in men's and kids were offset by softness in the active category as well as continued slower demand from the lower-income consumer.

Gap net sales of 755 million dollars were down 14 percent and comparable sales and comparable sales were down 1 percent. Excluding the negative impact from the sale of Gap China, the shutdown of Yeezy Gap and foreign exchange headwinds, net sales were down 4 percent versus last year. The company added that sales were driven by continued strength in the women's category offset by strategic store closures in North America.

Banana Republic net sales of 480 million dollars, down 11 percent, while comparable sales were down 8 percent. While Banana Republic maintained market share in the quarter, sales growth remained impacted in the short-term.

Athleta net sales of 341 million dollars declined 1 percent and comparable sales were down 7 percent.

Gap expects mid-single digit decline in FY23 sales

"As we look toward the long-term, we believe our focus on unlocking the value of our important and iconic brands coupled with the transformative actions we are taking to improve our operating structure will position Gap Inc. back on its path towards delivering sustainable, profitable growth and value for our shareholders," said Katrina O'Connell, executive vice president and chief financial officer, Gap Inc.

The company is estimating that third quarter net sales could decrease in the low double-digit range compared to last year's net sales of 4.04 billion dollars.

The company anticipates that fiscal 2023 net sales could decrease in the mid-single digit range compared to last year's net sales of 15.6 billion dollars.

Gap continues to expect gross margin expansion for fiscal 2023.