Gap prepares to give the store away this holiday season

Get ready to get a salivating deal on a hoodie or pair of underwear at Gap or Old Navy this holiday season as the struggling mall retailer looks to clear excess inventory ahead of 2023.

“We continue to anticipate a competitive promotional environment, given the increased inventory levels industry-wide and plan to continue to take aggressive action to clear inventory in order to enter fiscal 2023 better positioned,” said Gap CFO Katrina O’Connell on the retailer’s earnings call late Thursday. “We continue to rely heavily on markdowns and discounting to sell-through styles this quarter and have reduced receipts in Q4.”

Gap’s inventory ballooned 12% year over year in the third quarter amid a broader slowdown in consumer spending. Comparable sales were up a meager 1% as lower income shoppers pulled back on trips to Old Navy and consumers overall bought more cautiously on discretionary items.

The aggressive posture on discounting — which will likely hammer Gap’s profit margins in the critical holiday season — comes hot on the heels of another lackluster quarter and ongoing search for a permanent CEO.

Net sales rose 2% from the prior year to $4.04 billion. Sales at Old Navy rose a meager 2%, while the Gap brand saw sales stay stagnant from a year ago. Sales at Athleta rose 6%.

Adjusted gross profit margins tanked 320 basis points from a year ago.

Gap shares managed to rise 7% in pre-market trading on Friday as earnings of 71 cents a share beat estimates for breakeven.

The company said it sees fourth quarter sales falling by a mid-single digit percentage. No profit guidance was shared.

“Long-term, we believe a mix shift toward Old Navy and Athleta should improve the company’s margin structure. However, we think there are still risks around Old Navy maintaining its historical growth and margin rates, especially with growing competition. We believe slowing trends at Old Navy (drives ~60% of revenue and even more of profit) will be a key focus among investors near-term.While Athleta is a strong, growing brand, it is not large enough to drive the investment case at this time, in our view,” said Jefferies analyst Corey Tarlowe in a note to clients.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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