Gap beats quarterly estimates on steady demand for formal clothing

Gap Inc beat Wall Street estimates for quarterly sales and profit on Thursday, helped by steady demand from affluent consumers for its formal clothing and dresses despite a surge in inflation, sending its shares up about 10% in extended trading.

People are preferring more formal clothing, dresses, woven tops and pants, shelving casual wear like t-shirts and shorts as they return to travel, work and social occasions after two years of pandemic-induced restrictions.

Gap’s Banana Republic, an affordable luxury brand, posted an 8% rise in sales, while its Old Navy brand that has been struggling with out-of-fashion clothes reported a 2% increase.

However, Gap echoed retailer Kohl’s, which on Thursday warned soaring prices of essential commodities had dampened lower-income consumer’s spending on non-essentials like apparel.

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Image Source- Gap Inc

It expects fourth-quarter net sales to be down in mid-single digits, compared with analysts’ expectations of a 0.6% decline, according to Refinitiv IBES data.

“We did see strong volume in October slow a bit in the end and a little bit of a slow start to November,” finance chief Katrina O’Connell said on a post-earnings call.

Gap is expected to continue to struggle over the next 12 months because of its low- to middle-income consumer base and underperforming brands, Zachary Warring, equity analyst at CFRA Research said.

Heading into the holiday season and 2023, discounts could continue for brands like Gap due to a weaker consumer, he added.

The company reported $53 million in impairment charges related to Yeezy Gap. In October, Gap removed products from its Yeezy Gap line created in partnership with Kanye West, and shut down YeezyGap.com following the rapper’s anti-Semitic comments.

Gap’s third-quarter net sales rose 2.5% to $4.04 billion, topping analysts’ estimates of $3.80 billion. Excluding items, it booked a profit of 38 cents per share, compared with expectations of a break-even.