Tariffs Put Pressure on Gap’s Bottom Line Despite Strong Q1 Results

People walk past the entrance of a Gap store in Paris, France, July 1, 2021. New tariffs could impact Gap’s business by $100 million to $150 million, if they remain in effect, the company said Thursday when announcing fiscal first-quarter earnings. Shares fell more than 15% in after-hours trading.

Impact of New Tariffs

In a news release, Gap said new 30% duties on imports from China and a 10% levy on imports from most other countries will cost the company between $250 million and $300 million without mitigation efforts. For now, it’s leaving that impact out of its guidance. Gap said it’s already mitigated about half of those costs and without further action, the cost is expected to be between $100 million and $150 million, which will likely show up on the balance sheet in the back half of the year.

Mitigation Efforts

The company said it’s going to build on its mitigation efforts by continuing to diversify its supply chain and reducing its exposure to China. CEO Richard Dickson said on a conference call with investors Thursday that the company is planning to buy more cotton from the U.S. to help mitigate the tariff impact. “Based on what we know today, we do not expect there to be meaningful price increases or impact to our consumer,” Dickson told CNBC in an interview.

Fiscal First-Quarter Results

Beyond tariffs, Gap issued fiscal first-quarter results that beat expectations on the top and bottom lines. Here’s how the apparel company performed compared with what Wall Street was anticipating:

• Earnings per share: 51 cents vs. 45 cents expected
• Revenue: $3.46 billion vs. $3.42 billion expected
  The company’s reported net income for the three-month period that ended May 3 was $193 million, or 51 cents per share, compared with $158 million, or 41 cents per share, a year earlier. Sales rose to $3.46 billion, up about 2% from $3.39 billion a year earlier.

Guidance and Expectations

Gap’s guidance was largely in line with consensus, but its gross margin forecast came in weaker than expected. It’s expecting full-year sales to grow between 1% and 2%, in line with expectations of 1.3% growth. For the current quarter, it said it expects sales to be flat, compared with expectations of 0.2% growth. It’s expecting its gross margin to be 41.8%, weaker than the 42.5% that was expected.

Performance by Brand

Old Navy

Old Navy, Gap’s largest and most important brand, notched sales of $2 billion, up 3% compared with last year. Comparable sales grew 3%, ahead of expectations of 2.1%. Denim and active led the brand’s growth, which was buoyed by marketing designed to get all of Gap’s brands back at the center of culture.

Gap

The company’s namesake banner saw sales of $724 million, up 5% compared to last year. Comparable sales were up 5%, ahead of expectations of 3.4%. Dickson has focused much of his turnaround efforts on the Gap brand, and it’s been a standout performer over the last couple of quarters.

Banana Republic

The safari chic brand is still seeing troubles, with sales down 3% to $428 million and comparable sales flat, compared with expectations of 1.5% growth. The company said it remains focused on improving the brand.

Athleta

The athleisure brand has also been a drag on Gap’s overall performance, with sales down 6% to $308 million and comparable sales down 8%. The company warned improvements at Athleta “will take time.” Dickson said the brand has made strides in improving profitability but it needs to fix product and marketing to get Athleta back to growth.

Conclusion

Gap’s business is expected to be impacted by new tariffs, but the company is working to mitigate these costs through diversification of its supply chain and reduction of its exposure to China. Despite challenges, Gap’s fiscal first-quarter results beat expectations, and the company remains focused on its turnaround efforts, particularly with its Gap and Old Navy brands.

FAQs

• Q: How much could new tariffs impact Gap’s business?
  A: New tariffs could impact Gap’s business by $100 million to $150 million.
• Q: What is Gap doing to mitigate the tariff impact?
  A: Gap is planning to buy more cotton from the U.S. and continue to diversify its supply chain and reduce its exposure to China.
• Q: How did Gap perform in its fiscal first quarter?
  A: Gap’s fiscal first-quarter results beat expectations on the top and bottom lines, with earnings per share of 51 cents and revenue of $3.46 billion.
• Q: What are Gap’s expectations for full-year sales growth?
  A: Gap expects full-year sales to grow between 1% and 2%.
• Q: How did Gap’s brands perform in the quarter?
  A: Old Navy and Gap saw sales increases, while Banana Republic and Athleta continued to face challenges.