© Reuters. FILE PHOTO: The Gap logo is seen on the front of the company’s store on Oxford Street in London, Britain, July 1, 2021. REUTERS/John Sibley
By Katherine Masters and Ananya Mariam Rajesh
(Reuters) – Gap Inc (NYSE:NYSE) on Thursday reported a surprise first-quarter profit and its shares jumped 16% in extended trading as the apparel retailer cites restructuring efforts and reducing supply chain costs.
U.S. companies are beginning to see some relief in sky-high shipping and manufacturing costs after years of supply chain struggles.
Gap’s quarterly cargo margin increased 610 basis points on an adjusted basis due to lower air freight costs and improved advertising operations.
The company has seen lower inventory levels for two consecutive quarters as it struggles to deal with excess apparel it bought last year. According to Chief Financial Officer Katrina O’Connell, inventory is down 27% from a year earlier.
Gap, like many retailers, accelerated orders as consumer demand spiked during the COVID-19 pandemic, leaving only piles of unsold inventory as spending normalized.
“It was a better quarter than expected or feared,” said CFRA Research analyst Zachary Warring.
Since September, the retailer has eliminated about 2,300 company positions in two rounds of layoffs, joining a group of major US companies that are seriously downsizing as high inflation eats away at their wallets. consumers.
Interim CEO Bob Martin on a post-earnings call said the job cuts would contribute nearly $550 million in estimated annual savings on a cumulative basis.
Executives have pointed to a reduction in spending on wages and other operating expenses to improve margins, along with efforts to reduce inventory.
O’Connell said the company will close about 350 underperforming Gap and Banana Republic stores by the end of the year and plans to open fewer stores this year than planned.
However, sales of all four Gap brands fell during the quarter as the retailer struggled to update inventory and match consumer trends.
“I feel like they’ve got a lot of fruit in closing stores and cutting costs,” said Mari Shor, senior equities analyst at Columbia Threadneedle Investments.
“Now you really need Athleta and Old Navy, which are the engines of growth, to grow again, but I’m not very confident that will happen any time soon.”
Like major retailers, including Target (NYSE:) and Best Buy, Gap are also seeing weak demand as low- and middle-income consumers limit spending on non-essential items like clothing.
“The sales and sales instructions are worse than their peers, but they appear to be focused on profits,” says Warring.
Gap reported first-quarter adjusted profit of 1 cent, compared with a loss estimate of 16 cents, according to Refinitiv IBES data.
The company’s net revenue fell 6% to $3.28 billion. Analysts were expecting $3.29 billion.
Gap left its annual revenue forecast unchanged and expects second-quarter sales to decline at a moderate to high level. Analysts on average expect second-quarter sales to fall 4.95%.