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Old Navy Sales May Be Rising But Gap.. Not So Much..

Shares of Gap went tumbling after the clothing retailer announced its second quarter results due to the brand seeing a bigger drop than expected in its quarterly same-store sales.

Shares were down almost 7% in after-hours trading upon the report, despite profit and revenue beating Wall Street’s expectations.

San Francisco-based Gap reported earnings per share of $0.76 (excluding certain items) compared to $0.68 in the quarter a year ago. This also beat the 72 cents that analysts were waiting for.

Net sales for the quarter saw a growth of 7.5% to $4.09 billion, ahead of the $4.01 billion expected.

Gap beat on both the top and bottom line but it was the namesake Gap brand’s sales that had Wall Street concerned.

While Old Navy, which offers lower priced clothing, saw same-store sales rise 5%, ahead of the 4.5% expected, sales at Gap brand stores that have been opened for over a year dropped 5%. Analysts had been expecting a drop of just 2.55%.

Old Navy, which offers lower-priced apparel, again performed well. Same-store sales rose 5 percent, topping analysts’ estimate of 4.5 percent growth.

Chief Financial Officer Teri List-Stoll remarked, “Obviously, we’re not pleased with this performance. It reflects the conscious choice to prioritize margin dollars over comp growth as we continue to move through the inventory issues in the brand.”

Gap said that earlier offered huge discounts on Gap-label apparel mainly to clear inventories had ended up hurting sales and margins.

Neil Saunders, the managing director of GlobalData Retail said, “It discourages people from visiting and purchasing … It means Gap struggles to charge full price and has to resort to continuous discounting to try and stimulate sales.”

“Opportunity for improvement remains at [the] Gap division, while Old Navy and Banana Republic results were solid,” said Cowen & Co. analyst Oliver Chen. “With the new Gap brand president and management’s commitment to turn around the business, we think Gap’s mishap will be addressed by the end of the year.”

Stoll did say optimistically however that, “the second quarter played out largely as expected, and we are reaffirming our guidance on the year. We are pleased with the meaningful improvement at Banana Republic, and our work to increase productivity is funding investments in the business to drive differentiation and continued growth.”

Chief Executive Officer Art Peck also stated, “We delivered our seventh consecutive quarter of positive comparable sales growth, led by the strength of Old Navy. Our balanced growth strategy supports continued growth and improved profitability, and our investments are focused on leveraging the advantages of our scaled operating platform and accelerating the impact of our significant data assets.”

The company has reaffirmed its full-year diluted earnings per share guidance to be in the range of $2.55 to $2.70.

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