Gap Inc (NYSE:GPS) produced better-than-expected first-quarter results in its first quarter in a sign that the embattled retailer's cost-cutting initiatives are yielding positive outcomes.
Gap reported a first-quarter adjusted profit of $0.01, compared with estimates for a loss of $0.16 cents, which it attributed to reduced air freight expenses, decreased discounts, and a reduction in headcount and expenses.
Following the 1Q earnings beat, Gap shares were nearly 15% on Friday morning in early trading.
However, the company's net sales fell 6% to $3.28 billion. Analysts were expecting $3.29 billion.
Gap maintained its annual sales forecast and expects second-quarter sales to fall in the mid-to high-single-digit range. Analysts on average expect second-quarter sales to decline 4.95%.
Across Gap's four brands, Banana Republic and Athleta experienced significant drops in comparable sales, while Old Navy saw a slight decrease and the Gap brand managed a modest 1% increase.
Investors also took note of Gap's inventory reduction, which dropped by 27% over the first quarter following four consecutive quarters of double-digit increases.
The results indicate that Gap needs to lessen its reliance on cost-cutting to strengthen its bottom line and position itself for growth.
In April, the company announced plans to eliminate approximately 1,800 positions as part of a broader restructuring strategy aimed at achieving approximately $300 million in annual expense savings.
Looking ahead, Gap anticipates a net sales decrease in the mid-to-high single-digit range for the current quarter, partly due to the sale of Gap China earlier this year. The unit generated $60 million in sales during the same period in 2022, leading to a challenging year-over-year comparison. For the full year, Gap expects a net sales decline in the low-to-mid single-digit range but anticipates continued margin improvement.
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