Gap’s Q2 Results to Offer Update on Back-to-School Selling, Economy

Gap Back to School Campaign 2013 | Source: Gap

SAN FRANCISCO, United States — Gap Inc. is expected to report second-quarter results after the markets closes on Thursday as the clothing chain’s turnaround continues.

WHAT TO WATCH FOR: Analysts will want more details about the back-to-school selling season and will also be looking for comments on how shoppers are adjusting to new financial pressures like the payroll tax hike. The retailer, based in San Francisco, owns the Gap, Banana Republic, Old Navy, Piperlime, Athleta and Intermix brands

The results cap a second-quarter earnings season that has resulted in many major retailers including Wal-Mart Stores Inc., Target Corp. and Macy’s Inc. lowering their expectations for the rest of the year amid an uncertain economy. Many retailers are being tripped up by mixed messages about the economy. While jobs are easier to get and the housing market is gaining momentum, these improvements have not been enough to get most Americans to spend freely. Americans are facing stagnant wage growth while juggling other costs.

In particular, some retailers that cater to lower-income shoppers such as Wal-Mart and Target said their customers continue to struggle with a 2 percentage-point increase in the Social Security payroll tax in effect since Jan. 1. Some have also cited the shift in consumer spending toward bigger-ticket items like autos and home improvement that’s crowding out other spending.

Analysts will be dissecting any comments from Gap executives about how its shoppers are behaving in light of these economic pressures. Gap’s earnings report comes as it has seen its push into brightly-colored clothing, new designer collaborations and livelier stores help invigorate sales since early last year.

Last October Gap announced a management overhaul to help it respond more quickly to changing tastes around the world. The change, which went into effect in February, puts the North American, international, online, outlet and franchise divisions under a single global executive for each of the company’s brands. The company also formed a new innovation and digital strategy team to further advance those efforts.

Gap said earlier this month that its companywide sales trends improved for the month of July and its second quarter as shoppers responded well to its lineup of summer products at its namesake and Old Navy stores.

Gap said that its revenue for the second quarter increased 8 percent to $3.87 billion. It expects to earn 62 cents to 64 cents per share for the quarter. At the time, analysts polled by FactSet, on average, were anticipating earnings of 59 cents per share on revenue of $3.8 billion. Total revenue for July increased 5 percent to $1.12 billion.

The company reported that its revenue from stores open at least a year, considered a key indicator of retail performance because it strips away the impact of recently opened or closed stores, increased 1 percent for the month as gains at its namesake brand offset a drop at Banana Republic and Old Navy. This is compared with a 10 percent increase in July of last year.

Gap said that this same measure was up 5 percent for its second quarter, with gains in its Gap and Old Navy brands and a drop at Banana Republic. Analysts will be looking for any comments regarding the retailer’s strategies for luring shoppers into the stores during the winter holidays, the biggest selling season of the year.

WHY IT MATTERS: Gap is the nation’s largest mall-based clothing chain, so its results provide insight into consumer spending.

WHAT’S EXPECTED: Analysts expect earnings of 63 cents per share, according to FactSet.

LAST YEAR’S QUARTER: Gap earned 49 cents on revenue of $3.58 billion.