Shares halted after apparent early release

Gap Inc. on Thursday raised its full-year earnings forecast after seeing better-than-expected results at its biggest brand, Old Navy.

The clothing company's second-quarter financial results were released ahead of schedule after the company “inadvertently” posted them on its website and then removed them, a Gap spokesperson told CNBC.

“Once the error was discovered, we notified the New York Stock Exchange and trading of our shares was temporarily halted,” the company spokesperson said, adding that the results were published “as a result of an administrative error.”

Gap shares were halted from trading just before 10 a.m. ET. The company then released its quarterly results at 11:12 a.m. ET. Following the release, shares rose more than 2% after being halted for much of the morning.

Here's what the company announced, compared to what Wall Street expected, according to analysts surveyed by LSEG:

Earnings per share: 54 cents vs. 40 cents expectedRevenue: $3.72 billion vs. $3.63 billion expected

The company reported net income for the three months ended Aug. 3, which nearly doubled from the same period last year. Gap reported earnings of $206 million, or 54 cents a share, compared with $117 million, or 32 cents a share, a year earlier.

Sales rose to $3.72 billion, up about 5% from $3.55 billion in the same period a year earlier.

Gap now expects its full-year gross margin to be 2 percentage points higher than the at least 1.5 percentage points it had previously forecast. It also expects its operating income to grow about 50%. It previously expected it to increase just over 40%.

Over the past year, Gap has been working to transform its business, reverse a sales slump and restore its cultural relevance under the stewardship of CEO Richard Dixon — the company’s former CEO. Mattel He is credited with reviving the Barbie empire.

Since Dixon took over, sales have begun to turn around at the company’s four brands — Banana Republic, Old Navy, Athleta and its namesake brand — and the company has begun to regain its voice among its peers. Beyond sales and relevance, Gap’s earnings and balance sheet have improved dramatically under Dixon’s leadership. The company ended the quarter with $2.1 billion in cash, cash equivalents and short-term investments, up 59% from a year ago.

The company's second-quarter results did not meet expectations, but they represent a significant improvement from where the company was a year ago.

“We really focused on our strategic priorities, and the first priority was to maintain the financial and operational rigor that has become, to the extent that we can define it, the fabric of how we operate, and fosters better processes and cultural accountability,” Dixon told CNBC.

“The revitalization of our brands is done through financial and operational rigor, and you can see that. You can see that in the results, you can see that in our stores, you can see that on our websites,” he added.

“We’re building stronger brand identities. They’re supported by products that are on trend,” Dixon said. “We’re reinforcing those identities through better storytelling. Our media mix has become more innovative, and overall, I’m proud to be working the brand portfolio in the context of cultural relevance.”

During the quarter, comparable sales rose 3%, in line with the 3.1% growth analysts had expected, according to StreetAccount. Gross profit margin came in better than expected at 42.6%, beating the 40.8% analysts had expected, according to StreetAccount.

Here's a closer look at how each brand performed:

Sales rose 8% to $2.1 billion, with comparable sales up 5%, beating analysts’ expectations of 4.3% growth, according to StreetAccount. The company is improving its product lineup and ensuring that its value offerings are not only affordable, but stylish, too.

“We have increased our share of fashion, and as well as taking a more disciplined approach to financial and operational rigour, we are now working to increase our share of fashion and seeing the results of our revitalisation strategy,” said Dixon.

With consumers feeling the pinch of inflation and higher interest rates, many are turning to cheaper options, and Dixon said Old Navy is seeing “growth across all income brackets.”

“With the supposed value orientation, Old Navy is right there,” Dixon said. “We have become the style and brand authority in the value space, and so we are refocusing on our strategic approach and our strategic priorities. I think we are seeing success with that.”

Revenue from the Gap name brand rose 1% to $766 million during the quarter, with comparable sales up 3%, slightly below the 3.4% rise analysts had expected. Dixon said that while he was looking to bring cultural relevance back to the company, that helped the company’s name brand drive sales.

The rise in the price of Gap’s workwear has weighed on the company’s overall performance. Revenue and comparable sales were flat in the second quarter compared with a year earlier, versus StreetAccount’s estimate of a 0.5% increase. The company said it was working to “improve its pricing and assortment” to improve the brand’s performance.

“In some cases, we were way ahead of ourselves, and in other cases, we could have added more value to drive more volume,” Dixon said when asked about the work the company was doing to improve pricing.

“Some of our new marketing strategies include depth of product in the store, finding the right mix, if you will. And last but not least, really improving fit, which is an important part of any brand, but in particular, this has been a challenge in the women's space at Banana Republic, where we're really focused,” he said.

Sales at Gap’s Athleta brand fell 1% to $388 million, with comparable sales down 4%. The results were not comparable to analysts’ estimates.

Athleta was one of Gap’s strongest brands during the pandemic, and it was on a downward trajectory and weighed heavily on the company’s performance until it hired former Alo Yoga president Chris Blakeslee as its CEO last summer. Since then, Blakeslee has worked to improve Athleta’s lineup and also worked to generate more excitement for the product line through product launches and athlete collaborations.

In a press release, the company said it expects Athleta to return to positive comparable sales growth through the rest of the year.