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Earnings Results: Gap stock rallies after retailer swings to surprise adjusted profit

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Gap Inc. stock rose nearly 9% in the extended session Thursday after the retailer swung to a surprise adjusted profit and reported sales that were slightly above Wall Street expectations for the quarter.

Gap
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said it lost $49 million, or 13 cents a share, in the fiscal second quarter, contrasting with earnings of $258 million, or 67 cents a share, in the year-ago period.

Adjusted for one-time items, which Gap said excluded inventory and other charges, the company earned 8 cents a share.

Sales fell 8% to $3.86 billion, from $4.2 billion a year ago, Gap said. Same-store sales were down 10% year-over-year, including a 15% drop for the Old Navy brand.

Analysts expected the retailer to report an adjusted loss of 5 cents a share on sales of $3.82 billion.

The retailer had warned in July it was facing margin headwinds as it paid more for shipping and raw materials.

At the time, the retailer also announced the departure of Chief Executive Sonia Syngal and announced Executive Chairman Bob Martin as interim CEO.

Gap’s second-quarter margins were hit by about $50 million, the company said Thursday, which was in line with its July warning.

That was due to rising air-freight costs, higher discounting, mostly at Old Navy, and inflation pushing raw-material costs higher, the company said.

Lower discounts at its Banana Republic stores partly offset those, Gap said.

The retailer also withdrew its outlook for the year, pinning on the CEO transition. It said, however, that July sales and sales so far in August showed improvements and that the company is “cautiously optimistic” about the second half of the year.

Gap said it expects that air-freight costs will be stable then, and the investments it made in freight last year will give it more leverage. It said that it expects to balance inventories and demands better by spring.

Gap ended the quarter with cash and equivalents of $708 million. Inventory ended at $3.1 billion, up 37% year-on-year and including inventories not yet available in stores, Gap said.

Earlier this week, Victoria’s Secret cut its outlook for the year, and Nordstrom similarly called for lower sales for the rest of the year.

Inflation, diminished foot traffic in physical stores and ongoing supply-chain snags continue to wreak havoc on inventories and brought other problems that have dragged retailers’ shares in recent months.

Shares of Gap have lost 43% so far this year, compared with losses of 12% for the S&P 500 index
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