Gap (NYSE:) shares are trading about 4% lower today after the retailer announced its CEO, Sonia Syngal, will step down immediately as the clothing and apparel company attempts to recover declining profit margins.
Syngal Exits After Turbulent Period
While Syngal will stay at Gap during the transition, the company’s current executive chairman Bob Martin will step up as the interim president and CEO, the company said in a statement.
Syngal said she is thankful to receive the support from the board and happy to help the company forge a “new opportunity for a fresh perspective and rejuvenated leadership to carry Gap forward.”
“I think it’s a necessary change given Gap’s recent problems. The addition of a permanent CEO for Old Navy is positive as Gap’s needs to stabilize this part of the business,” said Morningstar analyst David Swartz, referring to Syngal’s exit from the company.
Earlier this year, the apparel giant pointed out certain execution challenges at its Old Navy unit, saying that the shift from casual to formal and partywear clothes made the business fall out of sync with the change in tastes.
Before stepping up as the company’s CEO, Syngal led the Old Navy business and has been in the company for 18 years.
Gap also announced a new leader for Old Navy, Horacio “Haio” Barbeito, who will be succeeding Nancy Green. Barbeito previously served as the president and CEO of Walmart (NYSE:) Canada, and will become the new chief of Old Navy on Aug. 1.
In April, Gap announced the departure of the unit’s then-CEO, Nancy Green.
Excess Inventory, Higher Costs Continue To Pressure Margins
With an aim of reducing inventory levels and creating room for fresh products, the San Francisco-based company doubled down on promotions. However, this move is anticipated to weigh on gross margins in the second quarter.
In addition, Gap also said it expects to continue seeing challenges in maintaining its profit margins in the second quarter as a result of higher costs.
Gap now expects its adjusted operating margin to be flat or mildly negative, compared with a 10.2% jump in the year-ago period. The company also expects net sales to be down in the high-single-digit range. Moreover, Gap said it still expects to face $50 million in costs during the quarter due to higher air transportation expenses and record-high inflation.
The company has been dealing with supply-chain constraints in the recent period, leaving the retailer with an apparel selection that didn’t attract many buyers.
Investors were not surprised with the slump in revenue growth after Gap had significantly trimmed its full-year profit guidance in April. At that time, Gap blamed the guide down on a sharp slump in Old Navy sales that hurt the company’s Q1 performance.
Syngal said back then that Gap’s Old Navy business has started to feel adverse effects caused by inflation.
“We’re dealing with really volatile consumer signals — whether it was last year in COVID, or this year’s post-COVID behaviors,” she said. “Over time, we’ll see customer preference for product types balanced out.”
Gap said it expects to see adjusted earnings per share in the range of 30 cents to 60 cents, down from its previous outlook of $1.85 to $2.05 per share. The slashed profit guidance compared with the consensus estimates of $1.34 per share with shares plunging 20% to a large miss.
The company said its sales performance was also hurt by an estimated 5 percentage points after it lapped a stimulus check boost last year. It also saw an additional 3-percentage-point hit related to store closures, and divestitures, as well as shifting its European business to a partnership model.
How Did Gap Perform In Q1?
For the , Gap reported a net loss of $162 million, compared to the $166 million profit recorded in the year-ago period. Revenue came in at $3.48 billion, down 13% year-over-year. Earnings reports can frequently impact the price of stocks, and that’s exactly what happened with GAP, as shares slid lower once the earnings report was released.
Same-store sales in the first quarter were down 14% compared to the year-ago period, while analysts were expecting a 12.2% decline. The retailer said online and in-store sales slumped 17% and 10%, respectively, relative to the same quarter last year.
On a more positive note, sales at the retailer’s Banana Republic unit were up 27% year-over-year, though Athleta sales were also down 7% from the year-ago period.
The retailer’s CFO Katrina O’Connell said the company had to reduce its guidance to account for the execution issues at its Old Navy business, as well as a volatile macroeconomic environment and inflation.
Gap’s recent struggles suggest a broader challenge that is hurting the retail industry, which is divided into companies targeting high-wealth consumers and those that aim to attract budget-conscious buyers.
Understandably, the latter has been far more affected by inflation as those consumers have already started cutting back on their purchases of non-essential items. Conversely, wealthier consumers continue to buy luxurious products and pay for summer vacations in the face of rising inflation.
Back then, the retailer said it expected to see a low- to mid-teens decline in sales relative to the year-ago quarter. Green’s unexpected exit from the company came amid a challenging period for Gap, which was battling with persisting logistics headwinds and inflationary pressures.
These issues have caused shipment delays, suggesting that the company hasn’t had enough merchandise to meet the demand in certain periods. The company said then it has adopted an “aggressive approach” to try to balance its merchandise collection at Old Navy, leading to higher promotional levels.
Gap is slated to report its second-quarter results in the second half of the next month.
Gap shares are trading lower once again after the company’s CEO Sonia Syngal quit amid challenges facing the retailer. Syngal struggled to execute in the challenging environment, with Gap stock price down over 50% YTD.
Moreover, Gap shares are trading lower today after the company offered negative commentary on Q2 trends with higher costs and excess inventory expected to negatively impact profit margins.