Gap (GPS) earnings report for the first quarter of 2022

Gap Inc. downgraded On Thursday, it guided its full-year earnings as it reported a decline in fiscal first-quarter sales, which were dented by its old marine business.

Shares fell more than 10% in after-hours after closing the day 4% higher.

An unbalanced mix of apparel volumes, persistent inventory delays, and a slight increase in price-cutting promotions dragged Old Navy’s underperformance during the quarter.

CEO Sonia Singhal told CNBC that the low-income consumer, Old Navy’s target customer, is starting to get jittery with inflation. In a phone interview, she said, shoppers have also quickly shifted from buying activewear and wool headgear – the “nice place” of Old Navy – to scavenging for party dresses and office wear.

“We’re dealing with really volatile consumer signals – whether it’s last year in Covid, or post-Covid behaviors this year,” Singhal said. “Over time, we’ll see a balancing of customers’ preference for product types.”

The Gap results indicate a greater divergence forming in the retail industry between those companies that cater to Americans who have a lot of money in their wallets and those that sell to cost-conscious shoppers who seek bargains.

With inflation rising, the latter has been hardest hit and has already begun to cut back on certain purchases. Meanwhile, wealthier consumers continue to flaunt expensive clothes, jewelry, and baggage for their summer vacations in stores including Nordstrom, Bloomingdales, and Ralph Lauren.

In late April, Gap warned of hurdles within the Old Navy business when it announced the departure of the unit’s chief executive officer, Nancy Green. Syngal has helped lead the discount clothing brand in the meantime, as the company searches for a successor to Green.

For fiscal year 2022, Gap now expects to earn between 30 cents and 60 cents per share, on an adjusted basis. This is lower than the previous range of $1.85 and $2.05. It is well below analysts’ expectations of $1.34 per share, based on Refinitiv data.

Chief Financial Officer Katrina O’Connell said Gap revised its outlook to take into account “executive challenges” at Old Navy, the uncertain macroeconomic environment and inflationary cost pressures. In addition, there is a slowdown in China that is hurting the namesake brand of Gap.

The gap turned into a net loss for the three months ended April 30 of $162 million, or 44 cents a share, compared to net income of $166 million, or earnings of 43 cents a share, a year earlier.

Revenue fell nearly 13% to $3.48 billion from $3.99 billion a year ago. That came in slightly above expectations of $3.46 billion.

Gap said its sales number was impacted by an estimated 5 percentage points related to the retailer wrapping around a year before its stimulus checks, as well as nearly 3 percentage points from divestitures, store closures, and switching of its European business to the partnership model.

Overall, same-store sales were down 14% from a year earlier, more than the 12.2% drop analysts were looking for. Within that number, Gap said its online sales are down 17% and in-store sales are down 10% compared to last year.

Here is a breakdown of same-store sales performance by brand:

• Gap: down 11% year over year
• Old Navy: down 22% from last year
• Banana Republic: 27% year-over-year increase
• Athens: 7% decrease

Gap executives also acknowledged Thursday that the recent push to sell more plus-size items at Old Navy has resulted in the retailer not carrying enough base sizes for customers, and too many extended sizes not being purchased.

“Our hindsight is that perhaps with the mass volume release, we’ve moved away from really messaging, the core of what works for Old Navy, which is valuable messaging,” O’Connell’s chief financial officer told CNBC in a phone call. “We’re really trying to get back into that.”

Gap total inventories on April 30 were up 34% over the previous year.

These levels will begin to decline throughout the year, O’Connell said, but may remain high in the second quarter.

“Our stock levels were much higher than we had hoped for,” O’Connell said, adding that nearly half of the unwanted increase was due to long transit periods that she expects won’t improve any time soon.

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