Yahoo Finance Gap CEO: Operational discipline is fueling a comeback for its long-running brands
The longtime Gap bears may be doing a double take after the company's latest earnings report.
Gap reported another straight sizable earnings beat Thursday evening as new leaders at the company cut bait with slow-moving inventory, reset styles at all brands, and executed more effective marketing.
Shares surged 24% in trading on Friday.
All in a day's work for Gap CEO Richard Dickson.
"We had margin expansion, both gross margin and operating margin expansion, and we did it off of 15% less inventory," Dickson told Yahoo Finance. "It's really indicating that customers are responding well to our brand reinvigoration efforts."
He added, "It's also the first time that all four of our brands have reflected positive [comparable sales], and that's in many, many years."
After a lengthy search, Gap named the former Mattel (MAT) COO as CEO, effective August 2023. Dickson, who sat on Gap's board before the appointment, was one of the Mattel executives behind the resurgence of Barbie, helping bring the doll to movie theaters last year.
Since taking over, Dickson has been on the road, visiting distribution centers and stores while meeting with top decision-makers at the retailer. The group diagnosed habitual issues (clunky website, less-than-cool products, supply chain inefficiencies) that have plagued the company's performance and stock price.
He's also made several key hires such as celebrity fashion designer Zac Posen to lead design, which has begun to bear fruit in the form of red carpet appearances for Gap clothing.
Dickson is hesitant to say that Gap is returning to anywhere near its glory days, but the steps toward a better future are happening.
"The first focus of our business is maintaining and building upon the financial and operational rigor that we have started to demonstrate ... We're strengthening the operating platform, supply chain, technology, culture, media marketing, and ultimately energizing our culture," Dickson said.
Rebuilding the foundation now gives the company an opportunity to rejuvenate its long-running brands. "We're really encouraged with what I'd call getting our vibe back," he said.
Said Citi analyst Paul Lejuez on the results, "Gap currently seems operationally/structurally stronger than it has in many years with Gap brand showing signs of a turnaround for the first time in 10+ years, Old Navy driving solid results and Athleta turning around faster than anticipated."
The earnings rundown
Net sales: +3% year over year to $3.4 billion vs. $3.28 billion estimate
Comparable sales:
Old Navy: +3% compared to -1% last year, vs. +2.5% estimate
Banana Republic: +1% compared to -8% last year, vs. -3.3% estimate
Gap: +3% compared to 1% last year, vs. +2.5% estimate
Athleta: 5% compared to -13% last year, vs. -4.6% estimate
Gross margin: 41.2% compared to 37.1% last year, vs. 38.5% estimate
Diluted EPS: $0.41 vs. $0.14 estimate
What else caught our attention
No excess clothing: Inventory levels fell 15% from the prior year.
Lots of cash: The company's total cash position surged 48% year over year to $1.7 billion.
Guidance:
Q2 24 net sales: Up low-single-digit percentage year over year
Q2 24 gross margin: Up 300 basis points year over year
2024 net sales: Up slightly (previous guidance: roughly flat year over year at $14.9 billion)
2024 gross margin: About 40.3% (previous: about 39.3% vs. 38.8% a year ago)
Trading on a trailing 12-month price-to-sales ratio of only 0.5x, some would argue Gap is a value stock. But is it? In the latest episode of Yahoo Finance's "Opening Bid" podcast, noted value investor Jonathan Boyar reveals his top ways to spot a great value stock. Listen in below.
Brian Sozzi is Yahoo Finance's Executive Editor. He is also the host of the 'Opening Bid' podcast. Follow Sozzi on Twitter/X @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email [email protected]. Are you a CEO and want to come on Yahoo Finance Live? Email Brian Sozzi.