Gap last night reported a surprise profit in the first quarter, and its shares jumped 16% in extended trading as the clothing retailer cited restructuring efforts and easing supply chain costs.
US companies are starting to see some relief from sky-high costs of freight and manufacturing after years of supply-chain snags.
Gap's quarterly merchandise margin increased by 610 basis points on an adjusted basis due to lower air freight expenses and improved promotional activity.
The company has seen two consecutive quarters of lower inventory as it works to clear excess apparel purchased last year.
Inventory volumes declined 27% from a year earlier, according to its chief financial officer Katrina O'Connell.
Gap, like many retailers, sped up its ordering as consumer demand surged during the Covid-19 pandemic, only to be left with piles of unsold inventory as spending normalised.
Since September, the retailer has eliminated about 2,300 corporate positions in two rounds of layoffs, joining a set of big US companies that are downsizing in earnest as high inflation eats into consumer wallets.
Interim CEO Bob Martin in a post earnings call said job cuts should contribute to nearly $550m in estimated annualised savings on a cumulative basis.
Executives pointed to lower spending on salaries and other operating costs in a bid to improve margins, along with efforts to reduce inventories.
The company will have closed about 350 underperforming Gap and Banana Republic stores by the end of the year and plans to open fewer stores this year than projected, O’Connell said.
Still, sales for all Gap's four brands declined in the quarter as the retailer struggled to update inventory and match consumer trends.
Like major US retailers, including Target and Best Buy, Gap is also witnessing weak demand as lower- and mid-income consumers curb spending on non-essential items such as clothes.
"Sales and sales guidance is worse than peers, but it looks like they are focused on profitability," Warring said.
The company's net sales fell 6% to $3.28 billion. Analysts were expecting $3.29 billion.
Gap maintained its annual sales forecast and expects second-quarter sales to fall in the mid to high-single digit range. Analysts on average expect second-quarter sales to decline 4.95%.
