Gap (GPS 5.59%) stock soared 17.1% in Thursday's after-hours trading, following the casual-apparel retailer's release of its report for the third quarter of fiscal 2023 (ended Oct. 28). The stock's surge is attributable to earnings crushing Wall Street's expectation and revenue coming in better than analysts had projected.
Following is an overview of Gap's third quarter, along with its annual outlook, centered on four key metric categories.
1. Revenue declined 7%
Gap's quarterly sales declined 7% year over year to $3.77 billion, which includes a 2 percentage-point negative impact from the company's sale of Gap China. This result exceeded the $3.6 billion Wall Street consensus estimate.
Comparable sales were down 2% year over year. Store sales fell 6%, while online sales decreased 8%. Online sales accounted for 38% of total sales.
While Gap is a global company, the bulk of its sales (87% in the just-reported quarter) are in the United States.
Below are the brand results.
| Segment | Fiscal Q3 2023 Sales | Overall Change (YOY) | Comparable Sales Change (YOY) |
|---|---|---|---|
| Old Navy | $2.13 billion | (1%) | 1% |
| Gap | $887 million | (15%) | (1%) |
| Banana Republic | $460 million | (11%) | (8%) |
| Athleta | $279 million | (18%) | (19%) |
| Total | $3.77 billion | (7%) | (2%) |
Data source: Gap. Fiscal Q3 2023 ended Oct. 28. YOY = year over year.
Key brand notes:
- Old Navy's sales were driven by strength in the women's, kids, and baby categories.
- Gap's sales were driven by strength in women's and baby. They also include an overall 9 percentage-point negative impact from the sale of Gap China and the shutdown of Yeezy Gap.
- Banana Republic "continues to work toward repositioning itself as a premium lifestyle brand and acquiring new, high-value customers," the company said in the earnings release.
- Athleta's sales "continued to be challenged as the brand laps last year's elevated discount levels and the team works to reengage its core customer," per the release.
2. Adjusted EPS fell 17%
Net income under generally accepted accounting principles (GAAP) was $218 million, or $0.58 per share, down 25% from the year-ago period.
Excluding one-time items, net income came in at $221 million, or $0.59 per share, down 17% year over year. This result raced by the $0.19 per share analysts had expected.
3. Operating cash flow was $832 million for year-to-date fiscal 2023
In the first three quarters of fiscal 2023, Gap generated cash of $832 million running its operations, a significant improvement from using cash of $112 million in the year-ago period. Free cash flow for the year-to-date fiscal 2023 period was $544 million, up from negative $689 million in the year-ago period.
The company ended the quarter with $1.35 billion in cash and equivalents, up 99% year over year, and $1.49 billion in long-term debt, flat with the year-ago period.
4. Full-year 2023 guidance reaffirmed
For fiscal 2023, which ends in late January 2024, management reaffirmed that it expects fiscal 2023 net sales could be down in the mid-single-digit range, compared to the year-ago period. On an apples-to-apples basis, this outlook is better than it might seem because fiscal 2022 revenue included about $300 million in sales for Gap China.
In addition, management continues to expect gross margin expansion for fiscal 2023.
A decent quarter, given the macro environment
In short, Gap turned in a decent quarter in light of the challenging macro environment for many companies, with interest rates high and inflation in some sectors of the economy still running higher than recent averages. This environment is particularly challenging for apparel retailers and other consumer discretionary companies with customers who are generally in the middle-income or below categories.
Companies that sell premium-priced products, such as Lululemon Athletica, tend to be more immune to macro challenges.
