What happened

Shares of Gap (NYSE:GPS) were plunging 18% lower in morning trading Wednesday after the apparel retailer posted disappointing third-quarter earnings.

So what

The strides Gap had been making on the back of the strength of its Athleta brand, which continued to perform well, faltered this quarter as profits fell short of expectations. The retailer reported earnings of $0.25 per share compared to Wall Street forecasts of $0.27 per share.

Add to that a clouded outlook for the fourth quarter due to rising numbers of COVID-19 cases, and Gap's stock was tumbling from the outset.

Athleta storefront

Image source: Gap.

Now what

Many retailers have been sustained by their online businesses, and that proved true with Gap, too, which reported digital sales rose 61% in the quarter. However, those gains were offset by a 20% decline in sales at its physical stores, meaning the traffic hit the clothing company is anticipating for its brick-and-mortar locations dampens whatever enthusiasm it might have felt otherwise.

Comparable-store sales rose 37% at Athleta, continuing the exceptional growth the brand has witnessed, and Old Navy seems to be getting back to form with a 17% rise in comps. But Gap's namesake stores and the Banana Republic brand are still struggling, with same-store sales down 5% and 30% respectively.

As Gap had been planning to invest more in its Gap stores, it seems the retailer has its work cut out for it.

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