Gap Inc. Sustains Momentum, Drives Q3 Comp Sales Up 5 Percent

Gap Inc., experiencing healthy third-quarter comparable sales gains at its three big brands, feels good heading into the heart of the holiday season.

“We see growth across all income cohorts — low, middle and high,” said Richard Dickson, president and chief executive officer, in an interview with WWD. “And while we do study and see data that suggests there’s macro pressure, particularly on the low-income consumer, our customers are really responding to our price, value and style. Our offerings are breaking through the competitive landscape. So we’re feeling very confident and excited as we head into the holiday season.”

On Thursday, Gap Inc. reported net sales of $3.9 billion, up 3 percent from a year earlier. Comparable sales for the three months ended Nov. 1 rose 5 percent, marking the seventh consecutive quarter of positive comps.

The retailer also reported its gross margin was down a bit due to tariffs, but still exceeded expectations and that there was less discounting during the quarter compared with a year earlier.

Performance varied by division in the third quarter, but the company’s two largest businesses, Old Navy and Gap, were each showing strength.

The company’s net income slipped to $236 million, or 62 cents a diluted share, down from $274 million, or 72 cents, a year earlier. The dip in the net was due to a slight decline in margin and a difference in the timing of some SG&A expenses. Gross margin of 42.4 percent decreased 30 basis points versus last year. Merchandise margin decreased 70 basis points versus last year, inclusive of an estimated net tariff impact of approximately 190 basis points.

“Overall, we thought our gross margin would be down substantially due to the 190 basis points of tariff headwind, but it was only down 30 basis points, and that’s because of the underlying strength of the business,” said Katrina O’Connell, Gap Inc.’s chief financial officer. “Better regular price sell-throughs due to the brands’ momentum and the consumer response to our assortments offset almost all of the tariff headwind so we only saw a slight margin decline in the third quarter.”

Excluding tariffs, Gap Inc.’s gross margin was up 120 basis points. “There was also some ‘favorability’ in commodities and supply chain levers, but we saw less discounting year-over-year as consumers really have responded well to our back-to-school and holiday assortments,” O’Connell said.

The San Francisco-based fashion specialty retailer raised its guidance for the year. Net sales are now seen growing 1.7 percent to 2 percent, versus the previous guidance of 1 percent to 2 percent. Last year, Gap Inc. generated $15.1 billion in sales.

The operating margin rate is expected to come in at 7.2 percent for the year including an estimated 100 to 110 basis points of net tariff impact. Previously, the company forecast an operating margin rate of 6.7 percent to 7 percent, including the tariff impact.

“Our holiday season is off to a great start,” Dickson said during the interview. “We’ve got exciting activations planned. The product looks great. Presentations and visual merchandising look strong, particularly in categories like fleece, denim and sleepwear. Our value proposition and our marketing executions are really resonating.”

More specifically, Dickson cited Old Navy’s Jingle Jammies, and Disney partnership, Gap’s “CashSoft” label focused on sweaters, hoodies and accessories.

Investors approved of the quarterly update and pushed shares of Gap up 4.4 percent to $24 in after-hours trading.

Asked about improving the performance of Athleta, Dickson replied that the new global brand president and CEO Maggie Gauger started 90 days ago. “She has been balancing near-term priorities with the longer-term reinvigoration of the brand. She’s been working very hard and very quickly, building her leadership team that aligns with her vision and is setting forth a foundation for the brand’s next chapter. She’s working on editing the assortment, studying the consumer, also evaluating the retail footprint. It’s really a reset year for Athleta, and we believe in the brand. The focus is going to be positioning Athleta for long-term success and bringing it back to its rightful place as a premium, purpose-driven, aspirational brand. It’s going to take time.”

Asked about the company’s level of promoting, Dickson responded: “It’s very dependent on the competitive environment that we operate. Promotions are a lever. When we combine them with great product and storytelling, they can drive excitement. They can drive conversion. I think we do this very well. In the third quarter, we were less promotional year-over-year, and we drove greater excitement, impact with our strong point of view and great product and great marketing.”

Banana Republic has been operating without a CEO for over a year. The search continues, though Dickson has been very involved in the brand’s turnaround effort. “The Banana team has done a great job leaning into the brand’s heritage and strengthening its positioning. We delivered another solid quarter with comps up 4 percent. That’s a clear sign that the brand’s reinvigoration is making steady progress. We’re seeing harmony now between men’s and women’s with elevated styles, refined fabrications, and Banana is continuing to perform. I think the third quarter really reflects meaningful progress.”

Regarding the search for a new leader of Banana Republic, Dickson said a lot of work on that has been done, adding: “The vision is now very clear and the opportunity has evolved. We’re excited about the talent that we’re speaking to.”

In his prepared statement Thursday, Dickson wrote: “We are proud to report that Gap Inc.’s third quarter results exceeded our net sales and margin expectations and delivered the seventh-consecutive quarter of positive comparable sales. Our strategy is working and we are gaining momentum with our three largest brands — Old Navy, Gap, and Banana Republic — each posting strong comparable sales. The strength of our third quarter and quarter-to-date performance positions us well for the holiday selling season and gives us the confidence to increase our full year net sales outlook to the high end of our prior guidance range and raise our full year operating margin outlook. We are focused on executing with excellence and finishing the year strong.”

In other results, Gap Inc.’s store sales increased 3 percent compared to last year. The company ended the quarter with nearly 3,500 store locations in 35 countries, of which 2,497 were company operated.

Online sales increased 2 percent compared to last year and represented 40 percent of total net sales.