Gap says higher-income shoppers are visiting its namesake stores, while lower-income ones go to Old Navy

By Bill Peters

Old Navy, Gap and Banana Republic all put up same-store sales gains in the third quarter, and shares rally after hours

Gap reported quarterly results on Thursday, and shares were up 4.5% after hours.

Shares of Gap Inc. rallied after hours on Thursday after the clothing chain offered a more upbeat full-year outlook, as wealthier customers drop by its namesake stores and lower-income shoppers increasingly hit its Old Navy locations.

The company - which owns Old Navy, Gap, Banana Republic and Athleta - reported the results as it tries to get its "vibe" back ahead of the key holiday-shopping season, while dealing with tariffs and cost-of-living increases that have hit the lower-income population harder.

Still, at Old Navy, Chief Executive Richard Dickson said that chain saw better demand "across all income cohorts." He said that was "encouraging, despite widely reported macroeconomic pressure on the low-income consumer."

Meanwhile, he said, Gap stores were attracting younger and higher-income consumers, while keeping its other consumers engaged, as it tries to take a stronger competitive stance "premium and value."

Shares of Gap (GAP) jumped 5.6% after hours on Thursday

Some analysts have said the divide is widening between wealthier people who own assets and those who don't. The potential impact of the government shutdown, which disrupted SNAP benefits for many low-income consumers, has also been in focus.

Earlier in the day, executives at Walmart (WMT) also said they saw "strength across income cohorts," but noted some slowing spending among lower-income shoppers. Still, the big-box giant was upbeat about its business overall. Meanwhile, discount chains Ross Stores Inc. (ROST) and TJX Cos. (TJX) have gotten more optimistic about the near-term future.

Gap said it expects sales growth of 1.7% to 2% for this year, a bit more optimistic than a prior forecast for a 1% to 2% gain. It also nudged higher its expectations for operating margins. That outlook included the estimated impact of tariffs, which have pressured profit margins and forced the U.S. clothing industry to rethink how and where they make products.

Gap over the past two years has tried to reinvigorate its image, following a prolonged period of higher costs for basics that weighed on clothing demand. The company brought aboard designer Zac Posen last year, and has tried to create sharper advertising overall.

For Gap's third quarter, same-store sales rose 5%, above FactSet estimates for a 3% gain. Dickson said the figure marked the seventh straight quarter of positive comparable sales.

Same-store sales rose at all of Gap's chains except Athleta, a women's athleisure and active-wear brand that has struggled with competition and challenges in keeping stylistic relevance. The turnaround there, management said, would take time.

Executives on Thursday said demand for denim was strong at Old Navy, calling out shoppers' interest in wide-leg and baggier fits in women's and girls' jeans. And they said a deeper expansion into beauty - beauty products are now in 150 Old Navy stores, with dedicated beauty shops and employees in some locations - represented "a clear and meaningful opportunity." At Banana Republic, management said "elevated" fashion designs were resonating.

"The strength of our third-quarter and quarter-to-date performance positions us well for the holiday selling season and gives us the confidence to increase our full-year net sales outlook to the high end of our prior guidance range and raise our full-year operating margin outlook," Dickson said in Gap's earnings release.

Revenue rose 3% year over year to $3.94 billion during the third quarter. That was above the $3.91 billion forecast by FactSet. Gap earned 62 cents a share, also above estimates.

Shares of Gap are still down 2.4% so far this year.

-Bill Peters

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11-20-25 2014ET