Gap sees weak sales as inflation-hit consumers rein in spending on apparel

Gap Inc on Thursday posted a bigger-than-expected fourth-quarter loss and forecast full-year sales below Wall Street estimates, signaling a slowdown in demand for its apparel as inflation-weary consumers curb discretionary spending.

Shares of the company fell about 8% in extended trading after the Banana Republic parent also forecast first-quarter sales below estimates.

With the Federal Reserve prepared to raise interest rates more than expected in an attempt to control inflation, consumers, especially at the lower- to mid-income rung, have turned more cautious and curbed spending on non-essential items.

The company's efforts to offer promotions and steeper discounts during the holiday quarter to get rid of excess inventory and spur demand further hurt its margins.

Gap also said the chief executive officer of Athleta, Mary Beth Laughton, was exiting the business effective immediately and a search is underway to find a new CEO for the brand.

The company is also seeing a slowdown in demand for casual and active wear as people returning to social occasions prefer more formal clothing. Sales at all of Gap's four brands were down in the reported quarter, with Athleta falling 1%.

While Old Navy, Gap's biggest brand has been struggling with outdated inventory, Chief Finance Officer Katrina O'Connell said Banana Republic had some holiday product misses including over-assorted sweaters and outerwear, with the gifting assortment not resonating with the consumer.

"We expect the next few quarters to be tough on Gap with a weaker economic backdrop than the previous two years and new management," CFRA Research analyst Zachary Warring said.

Gap expects first-quarter and annual gross margin expansion but Warring added this margin improvement is "nothing to get excited about."

The company expects fiscal 2023 net sales to decrease in the low- to mid-single digit range, compared with analysts' expectations of 1.64% rise, according to Refinitiv IBES data.