Despite a weak revenue outlook, Gap shares rise after retailer issues strong earnings guidance.

• Despite inflation and logistics challenges, Gap Inc.'s shares rose after the apparel retailer forecasted an upbeat profit for 2022.
• The retailer's overall performance was "muted" during its fiscal fourth quarter due to near-term disruptions.
• As investors made a long-term bet on the apparel company's improvements and the growing trend of American consumers looking to update their wardrobes, share prices rose Thursday evening.

Despite rising inflation and logistics challenges, shares of the apparel retailer climbed in after-hours trading on Thursday after it forecast an upbeat profit for 2022.

The retailer, which owns Banana Republic and Old Navy, is facing shipping issues that are causing supply chain snarls, but Gap CEO Sonia Syngal expects these issues to improve in the near term.

Despite sales in the holiday period being below pre-pandemic levels and Gap's first-quarter revenue declining more than anticipated, investors sent shares higher Thursday evening, as they made a longer-term bet on the apparel company's improvements and on more American consumers looking to refresh their wardrobes.

Other apparel retailers, including Gap, have expressed similar concerns about the challenges they face, such as high inflation, labor shortages, and global unrest caused by Russia's invasion of Ukraine.

Gap's annual forecast indicates that the companies that spoke this week about recent troubles securing merchandise over the holiday season due to supply chain constraints expect to turn a corner, despite pressures related to shipping and rising prices persisting at least through the first half of the year.

Despite analysts expecting a smaller 3.8% decline, Gap anticipates revenue contracting by a mid-to-high single-digit rate in the first quarter compared to the previous year.

According to a survey of analysts by Refinitiv, how Gap performed in its fourth quarter compared to Wall Street's expectations.

• Loss per share: 2 cents adjusted vs. 14 cents expected
• Revenue: $4.53 billion vs. $4.49 billion expected

In the three-month period ended Jan. 29, Gap swung to a loss of $16 million, or 4 cents per share, from net income of $234 million, or 61 cents a share, in the previous year.

Gap lost 2 cents a share, narrower than the 14-cent loss analysts had predicted, according to Refinitiv data.

Gap reported a 2% increase in revenue to $4.53 billion from $4.42 billion the previous year, exceeding expectations of $4.49 billion. Despite this, the company's sales decreased by 3% compared to 2019, partly due to planned store closures.

Despite analysts expecting a 3.7% increase in year-over-year same-store sales, the actual growth was only 3%. However, on a two-year basis, same-store sales did increase by 3%.

Gap's gross margins decreased to 33.7% in the fourth quarter, missing analysts' expectations of 35.2%, due to higher air freight costs, which were partially offset by the company selling more hoodies and denim at full price points, according to StreetAccount.

Here’s a sales breakdown, by brand:

• Old Navy experienced flat same-store sales in 2020 compared to 2019, which was partly due to supply chain issues.
• Gap's sales increased by 3% in two years, driven by North America's double-digit growth. The company stated that its brand is set to expand in the near future due to a partnership with Home Depot and its collaboration with Kanye West.
• In part due to ongoing store closures, Banana Republic's same-store sales decreased by 2% compared to 2019 levels, the company stated.
• Gap's women's athletic apparel line, Athleta, experienced a 42% increase in same-store sales over a two-year period. The company stated that Athleta is still on track to achieve $2 billion in annual sales by 2023.

‘More nimble and focused’

Syngal, the CEO, informed analysts during a post-earnings conference call that Gap anticipates improved delivery times for inventory shipments as the retailer diversifies its port exposure. She stated that the company has shifted its business to Eastern and Southern ports, which are experiencing significantly better performance than those on the West Coast.

"To become a more nimble and focused company, we have undergone significant restructuring," she stated during the call.

The retailer anticipates a 20% increase in inventories by the end of the first quarter compared to the previous year, as a result of booking merchandise orders earlier to compensate for longer transportation times.

The company highlighted the strength of its namesake Gap brand, the turnaround at Banana Republic, and the continued momentum at Athleta. Old Navy, which had been a core growth driver, should now correct as shipping challenges ease, the company stated.

Gap Chief Financial Officer Katrina O'Connell stated that the company still maintains a strong belief in its ability to expand its core brands and that its main objective is the long-term well-being of the business.

Gap anticipates earning between $1.85 and $2.05 per share on an adjusted basis, with sales increasing by a low single digit percentage in 2021. Analysts had predicted annual adjusted per-share earnings of $1.86, with sales growing by 1.6% from the previous year.

Gap expects to spend approximately 25% less on air freight expenses in 2022 compared to the $430 million spent in 2021, with about half of those savings realized in the first quarter, according to O'Connell.

The market value of Gap is $5.3 billion, and its gap shares have decreased by approximately 45% in the past 12 months, as of Thursday's market close.

Find the full financial press release from Gap here.