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Dive Brief:
Fresh off the release of its viral ad featuring global girl group Katseye in Gap denim, Gap Inc. on Thursday reported Q2 net sales flat to last year at $3.7 billion, with comps up 1%. Store-based sales fell 1% while e-commerce — about a third of net sales — rose 3%.
Old Navy net sales rose 1% to $2.2 billion, with comps up 2%; Gap rose 1% to $772 million, with comps up 4%; Banana Republic fell 1% to $475 million, with comps up 4%; and Athleta fell 11% to $300 million, with comps down 9%.
Gross margin contracted 140 basis points to 41.2%, and merchandise margin contracted 150 basis points. Net income rose nearly 5% to $216 million. Inventory was up 9%, mostly due to higher tariffs and the effort to import merchandise before duties increased.
Dive Insight:
Richard Dickson, who arrived in August 2023 as CEO with Gap Inc. in the doldrums, touted the company’s progress on a call with analysts Thursday.
“We still have plenty of work to do, because transformation of this scale takes time. However, it’s clear we’re now operating from a position of strength, one that’s proving essential as we navigate an increasingly dynamic and complex environment,” he said. “Our strategic priorities define the framework that has enabled us to perform while we’ve been transforming over the last two years, first maintaining financial and operational rigor.”
This has become fundamental to the company’s operations, and showed up in Q2 with gross margin expansion of 360 basis points to 41.2% compared to two years ago, he also said.
Dickson also called out a return to cultural relevance, especially at Gap, which had long ceded its status by the time he arrived.
“The Gap brand is building momentum, reclaiming its place in the cultural conversation with credibility,” he said. “We see a clear path forward for this brand, and are confident in our ability to build on this position of strength, fueling sustained growth for the brand over time.”
Gap Inc. hit a nerve about a week ago with its “Better in Denim” spot, featuring Katseye dancing to “Milkshake” in early aughts-inspired denim pieces. That was fueled in part by lingering controversy over American Eagle’s earlier denim ad featuring Sydney Sweeney, as well as dance moves that inspired TikTok users.
“Gap has been riding a wave of momentum from the flagship brand’s renewed cultural relevance, supported by a consistent showing by Old Navy and significant improvement in Banana Republic’s comp sales,” Emarketer Principal Analyst Sky Canaves said in emailed comments.
Canaves agreed that “Dickson has delivered on his promise to reinvigorate the Gap brand,” but said that “it remains to be seen if or how he can do the same for Athleta, where sales continue to decline.”
This year was always meant to be a time of reset for the athletic brand, but there hasn’t been much progress. Dickson expressed disappointment in its Q2 performance.
Maggie Gauger, a Nike veteran who arrived this month to take over leadership of the brand from Chris Blakeslee, “will help us stabilize the brand and ultimately put it on a path to growth,” Dickson said.
Import duties and their effects threaten to tarnish Gap Inc.’s renewed shine, analysts warned.
“Tariff impacts and rising inventories will add to margin pressures and cloud the outlook for the remainder of the year,” Canaves said.
That unravels some of Gap Inc.’s work over the last two years, according to GlobalData Managing Director Neil Saunders.
“The downside of this quarter came from tariffs, which will impact margins going forward. This is a shame as it undoes some of the financial progress Gap has been making on the bottom line,” he said. “However, as it is largely outside of management’s control, we do not see it as a slip-up. The positive news is that the sales trajectory remains intact, and Gap should remain in growth territory for the balance of the year.”