Apparel retailer Gap Inc reported an unexpected profit in the first quarter, leading to a 16% surge in its shares during extended trading. The company credited its restructuring efforts and reduced supply chain costs for positive results. After years of supply chain challenges, U.S. companies are finally experiencing some relief from the soaring costs of freight and manufacturing.
Gap's adjusted quarterly merchandise margin saw a significant increase of 610 basis points, driven by lower air freight expenses and improved promotional activity. The company has been actively reducing inventory levels over the past two quarters, with a 27% decline compared to the previous year.
However, Gap, like many other retailers, faced the issue of unsold inventory due to accelerated ordering during the COVID-19 pandemic, which resulted in a mismatch with consumer demand. The company has implemented cost-cutting measures, including two rounds of layoffs eliminating approximately 2,300 corporate positions. These actions, along with efforts to reduce inventories and control operating costs, are expected to contribute to estimated annualized savings of nearly $550 million.
Although Gap's overall sales declined in the quarter, executives expressed a focus on profitability and improving margins. The company plans to close around 350 underperforming Gap and Banana Republic stores by the end of the year and intends to open fewer stores than initially projected. However, the retailer faces the challenge of revitalizing growth for its Athleta and Old Navy brands, which are considered key drivers for the future.
Analysts noted weaker demand from lower- and mid-income consumers, who are cutting back on non-essential purchases like apparel. While Gap reported a profit of 1 cent in the first quarter, exceeding expectations for a loss of 16 cents, its net sales declined by 6% to $3.28 billion.