Gap Sales Top Pre-Pandemic Levels as Turnaround Efforts Gain Traction, Retailer Raises 2021 Outlook

• Gap's fiscal first-quarter sales surpassed pre-pandemic levels.
• Shoppers turned to Old Navy and Athleta to refresh their wardrobes for summer, the company said.
• Gap's namesake banner in North America showed early signs of improvement and e-commerce growth remained strong.

Gap said Thursday its fiscal first-quarter sales surpassed pre-pandemic levels, as shoppers turned to Old Navy and Athleta to refresh their wardrobes for summer.

The retailer raised its sales outlook for the full year as Gap's namesake banner in North America shows early signs of improvement and e-commerce growth remains strong. The company said 80% of its sales are coming from outside of the traditional shopping mall: Either online, in strip centers or from street-level locations.

But Gap continues to face supply chain challenges, as well as obstacles in sourcing raw materials, as Covid cases keep rising in countries including India, management said. A resurgence in Covid-19 cases in Canada, Europe, China and Japan will pose a risk to demand in the near term, it said.

Gap's stock was recently down about 2% in extended trading.

"While active and fleece continue to soar, we saw a resurgence in summer fashion with dresses rebounding, showing that customers are emerging from the crisis wanting to express their style without sacrificing the comfort and digital convenience they've become accustomed to," CEO Sonia Syngal said in a statement.

Here's how Gap did during the period ended May 1, compared with what analysts polled by Refinitiv were anticipating:

• Earnings per share: 48 cents adjusted vs. a loss of 5 cents expected
• Revenue: $3.99 billion vs. $3.45 billion expected

Gap swung to a profit of $166 million, or 43 cents per share, from a loss of $932 million, or $2.51 per share, a year earlier. Excluding one-time charges associated with the sale of Janie & Jack and Intermix, Gap earned 48 cents per share during the quarter. That came in well ahead of an expected 5 cent loss.

Total revenue grew to $3.99 billion from $2.11 billion a year earlier, when the retailer's stores were shut for a period of time due to the Covid pandemic. That topped a Refinitiv estimate of $3.45 billion.

Gap estimated that the ongoing Covid-related closures in markets outside of the United States lowered sales by 2% from 2019 levels during the latest period. Overall, fiscal first-quarter sales were up 8% on a two-year basis.

At Old Navy, comparable sales were up 35% year over year, and up 25% versus 2019. The Athleta business saw comparable sales rise 27% from last year, and jump 46% on a two-year basis. Together, these two brands drove 66% of company-wide sales in the latest quarter, Gap said.

At Gap's namesake banner, comparable sales globally grew 29% from last year, but were down 1% on a two-year basis. In North America, the brand showed signs of progress, with comparable sales in the region up 9% from 2019.

Banana Republic's sales fell 4% on a comparable basis year over year, and dropped 22% versus 2019, as fewer consumers have been looking for outfits to wear to work.

Online sales grew 82% from two years prior, accounting for 40% of total revenue. Store sales were down 16% on a two-year basis, mainly because of ongoing store closures and remaining Covid restrictions outside of the United States, Gap said.

A future outside of the mall

As Gap hunts for future growth, it will increasingly find it outside of traditional shopping malls, as evidenced by its latest results.

The company had announced last fall that it plans to shut about 350 of its Gap and Banana Republic locations in North America by the end of fiscal 2023, many of which are inside malls. As part of that roadmap, Gap said Thursday it will close 75 of those underperforming shops this year.

The retailer is now calling for adjusted earnings to be in a range of $1.60 to $1.75 per share this year, with net sales rising in the low- to mid-twenty percent range from 2020. Previously, it was looking for mid- to high-teens percentage sales growth.

Gap noted, however, that its outlook does not include any potential impacts from the ongoing strategic review of its European business, while Covid-related store closures overseas and port congestion remain headwinds.

Analysts had been looking for fiscal 2021 earnings per share of $1.38, with sales growing 17.8% year over year.

Gap will also soon be moving into Walmart's big-box stores, with the launch of a new home brand. And Gap's highly anticipated clothing collaboration with rapper Kanye West, on a line called Yeezy Gap, is still expected to debut later this year.

"Through partnerships, we can expand the reach of our brand to customers," Syngal said on an earnings conference call.

Gap shares closed Thursday up about 4%. The stock has risen 74% year to date, putting its market cap at $13.2 billion. 

Find the full earnings press release from Gap here.