Gap $GPS cut its full-year sales forecast on Thursday after its largest brand, Old Navy, fell short of expectations in the first quarter, sending Gap stock down more than 14% in after-hours trading.
Analysts had forecast 3% comparable sales growth at Old Navy, but the brand managed only 1% in the first quarter. With Old Navy generating close to 60% of Gap's total revenue, its 1% comparable sales gain — against analyst expectations of 3%, per CNBC — dragged down the company's annual targets, which now call for net sales growth of 1% to 2% rather than the previously projected 2% to 3%.
President and CEO Richard Dickson attributed Old Navy's weak quarter to a spring and summer assortment that failed to connect with shoppers rather than broader consumer weakness. "It's not a consumer issue," Dickson told CNBC. "We're winning with all income cohorts across low, middle, and high. When you have the right product at the right price value equation, customers are there, and our seasonal categories just got off to a weaker start." Dresses and swimwear were weak, while active, denim, and kids categories performed well, he said.
Across the company, Gap’s first-quarter net sales were $3.5 billion, a 1% increase from last year. Gap’s adjusted earnings per share were $0.38, just above Wall Street’s forecast of $0.37. A $313 million legal settlement boosted reported net income to $339 million.
Gap’s four brands had mixed results. The Gap brand had its best comparable sales in over 20 years, rising 10% and beating analyst expectations. Banana Republic saw positive comparable sales for the fourth quarter in a row, but its 2% gain was below the 4% analysts expected. Athleta’s turnaround has not yet worked, with overall sales down 12% and comparable sales falling 11%.
Despite a reduction in the sales forecast, Gap raised its adjusted earnings per share guidance for the full year to a range of $2.30 to $2.40, up from a prior range of $2.20 to $2.35, per CNBC. Tax rate favorability and interest income were cited by CFO Katrina O'Connell as the drivers behind the improved earnings guidance. An anticipated $80 million tailwind from lower tariff rates has been excluded from the official forecast, with O'Connell indicating the company is holding that figure in reserve.
For the current quarter, Gap forecast net sales to be flat to down 1% compared with a year earlier.