Gap Inc., showing improvements across its major divisions, reported that its third-quarter net income increased to $229 million from $204 million in the year-ago quarter. Comparable sales rose 3 percent.
The retailer increased its adjusted earnings per share guidance for the year to a range of $2.08 to $2.12, compared with previous guidance of $2.02 to $2.10.
“Today, we are happy to report our fourth consecutive quarter of positive comps, reflecting the continued momentum in key parts of our business,” said Art Peck, president and chief executive officer of Gap Inc.
“We continue to make progress against the balanced growth strategy we outlined in September, driving efficiency at our more mature brands, while growing our footprint in the value and active space, and investing in our online and mobile experience.”
Old Navy is still Gap’s big winner, but there’s some progress at the long-underperforming Gap and Banana Republic divisions. Old Navy’s global division saw comp sales rise 4 percent, Gap global was up 1 percent and Banana Republic global was down 1 percent.
The company now expects comparable sales for fiscal-year 2017 to be up by low single-digits.
Net sales for the third quarter of fiscal-year 2017 were $3.84 billion, compared with $3.8 billion for the third quarter of fiscal-year 2016.
The company ended the third quarter of fiscal-year 2017 with 3,639 store locations in 46 countries, of which 3,193 were company-operated.
Major news coming out of a conference call with retail analysts and investors was to continue improving performance at the Gap Brand division, which hasn’t been turned around yet; Gap’s sweeping store-closure strategy involving hundreds of units is one year ahead of schedule and should be done in 2018, and Peck’s forecast that Gap Inc. online is a path to becoming a $3 billion business.
“We had another strong quarter,” said Peck during the conference call Thursday. “It was our fourth consecutive quarter of positive comps and fifth straight quarter of gross margin expansion.”
The results came despite “significant challenges from natural disasters and unseasonable weather.” Gap Inc. had 277 stores closed for an average of six days during the quarter.
Peck said the company is pursuing “balanced growth” primarily through investing in growth in active and value sectors, which essentially means Athleta and Old Navy, and accelerating a “large, fast-growing, highly profitable accretive online business.…It’s on a path to being a $3 billion business.”
Through store closures, the company continues to reduce its exposure to traffic-challenged real estate, largely involving Gap and Banana Republic situated in malls. Over the next three years, the company expects to add about 70 net new stores, with the addition of about 270 Old Navy, Athleta and outlets across the portfolio, and close about 200 underperforming Gap and Banana Republic locations.
Discussing the divisions, Peck said Old Navy delivered “another very solid quarter up against high comparisons from a year ago.” Denim has been particularly strong, driven by construction, color, prints, hem treatments and silhouettes that resonated with customers. Peck also said Old Navy is getting faster with replenishment, which happens in nine to 14 weeks, depending on whether product arrives by ship or sent by air. “We will continue to get faster.”
Old Navy has been boosted by a “low-cost, highly-effective remodel” that has exceeded financial expectations and generated good customer response. While Old Navy continues to be productive, many of the stores are aging and look dated. “We call them the old Old Navys,” Peck said. They don’t usually merit a full gut remodel, but they typically get a fresh coat of paint, new lighting, remodeled cash wraps and some locations install a false wall to shrink the footprint and make the store feel more intimate, Peck said. Across the corporation, north of 100 remodels have been completed, with the bulk being Old Navy units; others involve Gaps and Banana Republics.
Athleta is “on fire,” Peck said, crediting some of the success to a responsive product pipeline, highly targeted and efficient marketing investments, and the addition of a girls assortment, which was important for back-to-school business when it became “fully expressed in all stores.…Everything in the Athleta assortment, whether it’s performance or lifestyle, has elements of innovation.” Online, Athleta is growing faster than the industry, Peck said. By the end of 2017, Athleta will have opened 15 stores for a total of 150. “We will continue to open new doors next year.”
With the Gap brand, Peck said the most important news is the progress seen, quarter over quarter. “We beat industry traffic during most weeks,” last quarter, Peck said. “We have more work to do and more progress to be made. We are not celebrating success, but we are pleased with results due to quarter-over-quarter improvement.”
Banana Republic, Peck said, has “a lot of heavy lifting to do to improve performance,” though there has been traction in some areas, particularly sweaters. “The team is focused on the right areas and making progress.”
The company has been making “tough calls” on store closings and is moving the Banana Republic team in New York to San Francisco to improve speed, quality and save costs, Peck said.
Peck also cited “excellent traction” in Gap Body. “We feel there is a real opportunity here. Gap Body is very much on-trend in the product space.”