What happened

Shares of Gap Inc (NYSE:GPS) were hit hard today after the apparel retailer posted a lower-than-expected profit in its first-quarter earnings report, as inventory issues continued to plague the company. As a result, the stock was down 14% as of 2:54 p.m. EDT.

Shoppers going up and down escalators at a mall.

Image source: Getty Images.

So what

Overall comparable sales were up 1% and were mixed across its three chains, as same-store sales were up at 3% at both Old Navy and Banana Republic, but down 4% at Gap stores. Net sales were up 10% to $3.78 billion, or 6% when adjusted for the new revenue recognition standard, which beat estimates at $3.61 billion. 

Adjusted gross margin was down 120 basis points to 36.7% due to inventory challenges at the Gap, and adjusted operating margin fell 110 basis points for 6.3%. Operating income dropped 10% to $229 million, but adjusted earnings per share increased from $0.36 to $0.42, due to a lower tax rate from the new tax law, which missed estimates at $0.46.

CEO Art Peck said, "We are pleased to have delivered our sixth consecutive quarter of positive comp growth, despite the expected challenges at Gap brand."

Now what 

Despite the weak bottom-line results, management maintained its guidance at $2.55 to $2.70 for the full year, up from $2.13 a year ago, saying it was "confident in the underlying fundamentals of the business." The company also sees full-year comparable sales of flat to up slightly.  

While the expected earnings and comparable sales growth is a positive sign, the ongoing headwinds at the namesake Gap stores were enough to shake the market. In today's retail environment, only perfect numbers seem to be good enough to please investors.


This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.