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(Reuters) -Gap Inc on Thursday reported a surprise profit in the first quarter, benefiting from the apparel retailer’s restructuring efforts and easing supply chain costs.
Shares of Gap rose 13% to $8.40 in extended trading.
U.S. companies are starting to see some relief from sky-high costs of freight and manufacturing after years of supply-chain snags.
Gap’s quarterly merchandise margin increased by 610 basis points on an adjusted basis due to lower air freight expenses and improved promotional activity.
The company has seen two consecutive quarters of lower inventory as it works to clear excess apparel purchased last year.
Gap, like many retailers, sped up its ordering as consumer demand surged during the COVID-19 pandemic, only to be left with piles of unsold inventory as spending normalized.
Since September, the retailer has eliminated about 2,300 corporate positions in two rounds of layoffs, joining a set of big U.S. companies that are downsizing in earnest as high inflation eats into consumer wallets.
All of Gap’s four brands saw a decline in sales in the quarter as it struggles to update its inventory and match consumer trends.
“I feel like they’ve picked a lot of the low-hanging fruit in terms of closing stores and cutting costs,” said Mari Shor, a senior equity analyst at Columbia Threadneedle Investments.
“Now you really need Athleta and Old Navy, which are the growth drivers, to return to growth, but I have pretty little confidence in that happening in the near term.”
Like major retailers, including Target (NYSE:TGT) and Best Buy, Gap is also witnessing weak demand as lower- and mid-income consumers curb spending on non-essential items such as apparel.
Gap posted a first-quarter net loss of $18 million, or 5 cents per share, compared with a net loss of $162 million, or 44 cents, a year earlier.
The company’s net sales fell 6% to $3.28 billion. Analysts were expecting $3.29 billion, according to Refinitiv IBES data.
Gap maintained its annual sales forecast and expects second-quarter sales to fall in the mid- to high-single digit range. Analysts on average expect second-quarter sales to decline 4.95%.
It reported first-quarter adjusted profit of 1 cent, compared with estimates for a loss of 16 cents.
