Gap Inc. Slashes Forecast after Poor Q3 Results

In Reports, What's New, Industry News by Jeff Prine

Old Navy continues to be Gap Inc.'s best performing division

Old Navy continues to be Gap Inc.’s best performing division

San Francisco—Gap Inc. cut its full year earnings forecast Thursday afternoon due to declining sales and discounting that soured its third quarter results. Consequently, the company saw its shares drop nearly 6% in early trading on top of a 40% decline so far this year.

The company blamed the strengthening dollar, particularly against the Japanese yen and Canadian dollar, which impacted sales by about $100 million in the quarter. Gap Inc. had earlier expected an impact of $98 million.

Net income was $248 million, or 61 cents a share, down from $351 million, or 80 cents a share, for the same period last year. Adjusted earnings were 63 cents a share in line with analysts’ estimates.

Total revenue was down 3% to $3.86 billion, again in line with analysts’ estimate. Comparable store sales were off 2%. Old Navy again buoyed today sales. The division’s comp store sales were up 4%. But Gap and Banana Republic continue to show declines. Comparable sales fell 4% at Gap and 12% at Banana Republic.

‘Worse Than We Thought’

Online sales were up 2.3% to $635 million. Gross margin narrowed to 37.3% from 40.2%. Operating expenses slipped to $1.03 billion from $1.04 billion.

“With a challenging third quarter behind us, we are sharply focused on holiday execution across all channels,” said CEO Art Peck. “We are driving forward on our key strategies designed to fuel future growth. Old Navy delivered another consecutive quarter of growth. Gap has made clear progress on its transformation agenda and we look forward to introducing customers to the brand’s spring collection, which embodies elevated American style.”

Peck has said that his turnaround plan will begin to pay off in the spring, signaling that the holidays will be a tough stretch for the retailer.

The company lowered full-year earnings per share guidance to between $2.38 and $2.42 from $2.75 to $2.80. The consensus estimate is for $2.52.

“A weak third quarter doesn’t bode well for the fourth quarter,” said Ed Yruma, analyst at Keybanc Capital Markets. “The environment is worse than we all thought, but Gap wasn’t expecting the holidays to be a quick fix. It will take some time for them to get back to where they were.”

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