Gap Inc. beat profit estimates and lifted its earnings guidance on Gap-brand strength, even as it trimmed its sales outlook for a struggling Old Navy, and named a new president to fix it.
Gap Inc. reported second-quarter net sales of $3.7 billion, down 2% from a year earlier, with comparable sales down 1%. Adjusted earnings of 52 cents a share beat the 49-cent consensus estimate, and gross margin expanded 20 basis points to 41.4%. Shares rose roughly 12% in premarket trading Friday, extending a jump of more than 11% reported in Thursday's after-hours session, using Wednesday's close of $21.15 as the baseline.
Two headlines from the release read, at first glance, like they contradict each other: the company raised its annual profit forecast on the strength of its namesake Gap brand, while separately trimming its sales outlook because of continued softness at Old Navy. They aren't actually in conflict. A company can raise profit guidance on strong performance at one brand while cutting sales guidance because of weakness at another, larger one, without either statement being wrong. That's precisely the picture Gap Inc. described: a genuinely mixed report across its two biggest brands, not a data discrepancy requiring resolution.
The company paired that mixed picture with a leadership change at the brand carrying the weight of the sales-outlook cut. Michael Francis, who previously worked at Walmart and Target, was named president and chief executive of Old Navy, effective November 2, succeeding Haio Barbeito, who is moving to an advisory role. A new executive named the same day the company acknowledges the brand's sales trajectory needs to improve makes this more than a routine management update; it's the clearest, most checkable signal in the release of how the company plans to address the softer half of its mixed results.
None of this changes what actually happened in the quarter that just closed: profit beat, margins expanded, and the market reacted about as positively as a beat-and-mixed-guidance report can produce, with shares up double digits. What it does is set up a specific test for the next several quarters: whether new leadership at Old Navy can turn around a sales trend the company itself flagged as a problem, or whether the gap between Gap-brand strength and Old Navy weakness widens further before it narrows.