Gap Inc.’s second quarter turned out as expected — and that’s pretty good.
Results were led by Old Navy, which continued to grow market share and is on pace to exceed $10 billion in annual sales, and Athleta, which has a goal of breaking $1 billion.
The long-ailing Banana Republic division showed improvement, while Gap brand continues to work out assortment issues and lose share. The Gap team, led by Neil Fiske, who joined as president and chief executive officer in June, is focused on stabilizing the business and inventory “imbalances” heading into the fall.
“We will see improvement through the year. I believe the worst is behind us,” Gap Inc. chairman and ceo Art Peck said during a conference call after the corporation reported that its second-quarter net income rose to $297 million from $271 million a year ago, while total sales gained 8 percent to $4.1 billion from $3.8 billion a year ago.
Comparable sales rose 2 percent, with Old Navy ahead 5 percent, Gap brand down 5 percent and Banana Republic up 2 percent.
“We delivered our seventh consecutive quarter of positive comparable sales growth, led by the strength of Old Navy,” said Peck. “Our balanced growth strategy supports continued growth and improved profitability, and our investments are focused on leveraging the advantages of our scaled operating platform and accelerating the impact of our significant data assets.”
“The second quarter played out largely as expected, and we are reaffirming our guidance on the year,” said Teri List-Stoll, executive vice president and chief financial officer. “We are pleased with the meaningful improvement at Banana Republic, and our work to increase productivity is funding investments in the business to drive differentiation and continued growth.”
Near-term, major growth drivers as cited by Peck revolve around:
• BOPIS — which stands for buy online, pick up in store. At Old Navy, marketing the BOPIS service just began a couple of weeks ago. “Twenty percent of our customers are buying incrementally when they come into our stores. That’s something that has a long-term, big potential for us,” Peck said.
• Gap Inc.’s “large, fast-growing and very profitable online business, which crossed $3 billion in sales last year and is on track to reach $3.5 billion this year,” Peck said.
• Data. “Because of our size and scale, we have immensely valuable data assets which we are just beginning to explore. The value of converting data to insight and action is huge.”
• Rolling out personalization across brands. “We see 5 percent improvement in conversion as posed to non-personalized experiences,” Peck said.
• Banana Republic “has growth that nobody really appreciates,” Peck said. “We have a good share opportunity. It’s not like the department store sector is thriving at the moment.” The division posted its third consecutive quarter of positive comps and experienced merchandise margin expansion.” The assortment, Peck said, is “more consistent and better executed and the customer is responding.”
• Extending plus sizes to Old Navy stores, 75 initially. “Plus-size business online at Old Navy falls within top 10 women’s plus-size brands,” according to NPD, Peck said.
But the big question mark remains the Gap brand. It’s been losing market share for years, continues to close weak stores and continues to have what many see as an uncertain future.
“I want to love Gap brand and want to be objective about whether there is something more wrong than execution,” said Peck.
He said the company with outside assistance conducted a “quantitative evaluation” involving thousands of consumers gauging the “functional and emotional equities” of the Gap brand. The conclusion: There are “issues on functional equities. Emotional equities are quite strong and that actually is encouraging,” Peck said. “Functional equities are easier to address than the emotional issues.…We are relentlessly objective about this business. There are no delusions.”
Although Gap Inc. beat expectations for the quarter on both the top and bottom, concerns about Gap division brought shares down close to 7 percent in after-hours trading to $30.20.