Gap Inc again had to rely on its budget brand Old Navy to deliver modest growth in the first quarter, as its core namesake brand stuttered yet again.

Of its three main labels, Old Navy’s global sales rose 3 per cent, far slower than the 8 per cent of the same period last year, but better than the 4 per cent decline of Gap, an identical decline to last year.

The smaller, more premium Banana Republic brand achieved 3 per cent growth verses a 4 per cent decline last year.

When the performance of new stores is included in the figures, they seem a little more robust. Net sales were $3.8 billion, up 9.9 per cent on last year, and gross profit was $1.43 billion, up 10 per cent.

But while Gap CEO Art Peck said he was pleased to have delivered the company’s sixth consecutive quarter of positive same-store growth – 1 per cent when all the brands’ sales were combined – analysts were less enthusiastic.

Although Gap’s headline sales growth looks very strong, the reality is that it is inflated by both currency gains and a change in the way revenue is accounted for,” observes GlobalData MD Neil Saunders. “As neither of these things reflects a true upswing in trading, it is necessary to strip them out to get a realistic appreciation of performance. When this is done, the 9.9 per cent growth rate translates into a more subdued 4.7 per cent increase. This isn’t bad, but it is not quite so robust – especially when it comes off the back of a weak prior year comparative.”

Saunders says the more lacklustre headline sales number is reflected in the comparable sales figures.

“This is a mixed set of numbers that underlines the fact that Gap still has a very mixed set of brands, some of which need a lot more work than others.”

GlobalData’s research shows the Old Navy proposition is still resonating with consumers, particularly families. Sharp prices and some solid fashion edits are helping to drive store visitation and conversion.

He says it is hard to pinpoint why Banana Republic’s performance has improved. “It could be because sales are finally bottoming after a very long run of weak performance. It could be because existing customers are spending a little more thanks to the buoyant economy. Or, it could be because some of the changes being made under the new leadership are gaining ground. The reality is that it is likely a mix of all three factors, but we maintain our view that it is too early to call Banana Republic’s recovery sustainable.”

But of Gap, the largest brand of them all, Saunders says the “blunt truth” is that little has changed.

“The product mix still consists of the same boring basics, there is an absence of fashion trends, base prices remain out of kilter, and discounting is rife. While Gap’s management notes that the brand is in transition and discounting is necessary to sell down excess inventory, we are not confident that the strategy is anywhere near optimal. In short, Gap is still a brand struggling for relevance.”

Athleisure success

A bright spot for Gap Inc is its fledgling athleisure brand Athleta, which is believed to have delivered a strong performance, despite a lack of mention in the results statement.

Saunders says Gap deserves credit for Athleta’s performance as it is navigating a crowded market in which athleisure and fitness sales have softened. “We believe that good product innovation along with solid marketing and strong in-store merchandising have all helped boost revenue. The girlswear part of Athleta has also likely benefited from the withdrawal of Lululemon’s Ivivva concept from physical locations. This concept has very good forward potential.”

Gap Inc CFO Teri List-Stroll believes the company’s balanced growth strategy is providing a solid foundation to differentiate its portfolio of brands in what is a challenging retail environment.

“Despite the pressures we faced in the first quarter, we are affirming our full-year guidance, reflecting our confidence in the underlying fundamentals of the business.”

Saunders’ response: “Gap is in a better position than it was a year ago. However, we also believe that management talks a better game than it is actually playing.”