Gap Has 4 Brands and Only One Is Really Growing. Gap Stock Now Depends on It.

Gap Inc. (GAP +12.94%) shares jumped about 13% Friday, the day after the apparel retailer reported fiscal second-quarter results and nudged its full-year profit outlook higher. The market liked the margins, the raised guidance, and news of a new leader for the company’s biggest brand.

But the quarter was more lopsided than a pop like that suggests. Gap Inc. runs four brands (Old Navy, Gap, Banana Republic, and Athleta), and in the fiscal second quarter, exactly one of them was growing in any meaningful way. Total company net sales fell 2% year over year to $3.7 billion.

The brand that was growing happens to share its name with the stock. Here’s a closer look at the quarter, brand by brand.

Image source: Getty Images.

Only one brand is really growing

The namesake Gap brand grew net sales 9% year over year to $844 million, with comparable sales up 10% — what CEO Richard Dickson called “another quarter of double-digit comparable sales.” That’s the second quarter in a row of double-digit comparable growth, and it’s momentum most mall retailers would love to have.

The rest of the portfolio went the other way. Old Navy’s net sales fell 4% to $2.1 billion, with comparable sales also down 4% — a reversal from growth a year ago, which management attributed partly to a weak women’s seasonal assortment and slowing traffic.

Banana Republic inched up 1% to $478 million, with comparable sales up 3%. And Athleta, the activewear chain, saw net sales sink 12% to $264 million. Its comparable sales fell just as much, on top of a 9% decline a year earlier.

Old Navy is more than half the company

Why does one brand’s stumble outweigh another’s surge? Scale. Old Navy’s $2.1 billion in quarterly net sales is about 57% of companywide net sales. The growing Gap brand, at $844 million, is well under half Old Navy’s size. Growth of 9% at the smaller brand cannot offset a 4% decline at the bigger one. In dollars, Old Navy’s slip erased roughly $85 million of quarterly sales while the Gap brand added about $70 million, which is how a company with a hot brand still shrank overall.

Management is acting on it. Gap Inc. named retail veteran Michael Francis as Old Navy’s next president and CEO, succeeding Haio Barbeito.

And the company’s updated outlook quietly acknowledges the problem. It now assumes Old Navy comparable sales of flat to down 1% for the year, cut from flat to up 1%, while its assumption for the Gap brand moved up to high-single-digit to low-double-digit comparable growth. The full-year plan got better, in other words, and the only brand assumption that moved up was the smaller one.

Check the adjusted numbers, not the reported ones

The reported results look spectacular. Gross margin came in at 52.8%, and earnings reached $1.38 per share.

But most of that is an accounting event, not retailing. The quarter included a $417 million net benefit to cost of goods sold from refunds of U.S. tariffs the company had previously paid, with the remaining refund cash expected in the third quarter.

Set the refund aside, and the underlying quarter was solid rather than stunning: an adjusted gross margin of 41.4%, up 20 basis points, and adjusted earnings of $0.52 per share. For the full year, the company raised its adjusted outlook to between $2.35 and $2.45 in earnings per share, up from a range of $2.30 to $2.40, on an adjusted operating margin of about 7.4% to 7.6%. Notably, the net sales outlook came down a touch at the top end (up 1% to 1.5%, versus up 1% to 2% before).

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