By Akriti Shah and Neil J Kanatt
May 29 – Shares of and tumbled over 16% in early trading on Friday after both retailers issued weak forecasts, signaling deepening pressure on consumer discretionary spending.
The Old Navy parent cut its annual sales forecast as it works through a turnaround, while American Eagle kept its forecasts intact but cautioned on near-term gross margins, with both flagging weakness in certain women’s apparel categories.
The results underscore a widening split in consumer spending, with record-low sentiment driven by the Iran war forcing lower-income households to cut back, even as higher-income shoppers remain selectively willing to spend.
Earlier this week, Abercrombie & Fitch and Bath & Body Works posted strong quarterly results, indicating continued appetite from American shoppers for affordable indulgence.
“(Gap’s) moderated outlook is disappointing against the backdrop of a relatively resilient consumer through the first quarter of the fiscal year, broadly speaking,” Telsey Advisory analyst Dana Telsey said.
Pressure at Gap was centered around Old Navy, where seasonal women’s apparel, including dresses, failed to connect with shoppers, analysts said. BTIG analysts called Old Navy the “key swing factor.”
However, some analysts said that the company’s push into the higher-margin beauty category could help Gap in the longer term.
American Eagle also faced challenges as the strength at Aerie failed to offset weakness at its core brand, with women’s bottoms hurt by shifting trends and a colder spring.
The company recently launched another campaign with actor Sydney Sweeney to attract Gen Z shoppers, a year after a viral and controversial ad featuring Sweeney fueled a stock rally.
Barclays analysts, however, cautioned that repeating last year’s success may be difficult even as marketing spending is expected to recur in the current quarter.
The American Eagle brand continues to lag Aerie by a wide margin, challenging expectations of improvement, despite the brand’s plans to correct its women’s assortment for the back-to-school season, Telsey added.
Gap currently trades at 10.30 times its estimated earnings for the next 12 months, compared with 9.70 times for American Eagle and 7.43 times for Abercrombie & Fitch, according to LSEG data.
Broader pressure was also felt in Europe, with Stockholm-listed shares of H&M falling about 1% earlier on Friday.
