New Gap CEO has a lot of work to do, Nordstrom needs more sales growth: Analyst

Both Gap Inc. (GPS) and Nordstrom (JWN) reported their quarterly results after the market close on Thursday. Gap's results were mixed, with adjusted earnings beating estimates, but revenue falling short. Nordstrom beat on both the top and bottom lines. Morningstar Equity Analyst David Swartz joined Yahoo Finance Live to discuss the results.

Gap has a new CEO at the helm, former Mattel executive Richard Dickson. Swartz says Dickson "has a lot of work to do. These sales numbers for Gap are quite poor." Swartz notes that Gap has done a lot of cost cutting, which is helping the bottom line, but "all of Gap's concepts are really struggling with the top line." Swartz says Dickson should focus on fixing Old Navy and Athleta first because they have the most potential.

On Nordstrom, Swartz says overall, sales were better than expected, but that's more because expectations were so low. Swartz also notes that, like Gap, Nordstrom has been cutting expenses, but more top-line growth is needed. On Nordstrom's off-price unit Rack, Swartz says the problem is that "Nordstrom doesn't seem to know what to do with it. It seems like every quarter we hear a different story about what Rack's place is in discount retail and its place at Nordstrom."

Video Transcript

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SEANA SMITH: Watching shares of Gap at Nordstrom. Both retailers out with their second quarter results. Shares of both companies actually moving to the upside here in extended trading. Gap up just about 3%. We want to bring in Morningstar equity analyst David Swartz. And David, real quick, let's just recap the numbers that we got here. So Gap sales missed. Total comp sales coming in worse than expected to drop of 6%. Same-store sales, they're dropping across all four brands.

And then you also take a look at Nordstrom, a bit of a different picture there. Better-than-expected earnings, revenue, same-store sales were also higher than what the Street was looking for. We are starting to see some strength in Racks off price store. The decline there smaller than what the Street was looking for. David, though, let's start with Gap, since that was really the focal point after-hours here. We have a new CEO at the helm. What do you think of this report and how this sets up the new CEO Richard Dickson here as he tries to get Gap back on the right track?

DAVID SWARTZ: He definitely has a lot of work to do. These sales numbers for Gap are quite poor. It looks like the EPS was above expectations due to lower costs. Gap has done a lot of cost-cutting, a lot of layoffs. And that is helping the bottom line. But the reality is that all of Gap's concepts are really struggling with the top line. And a negative 6% comp for Old Navy is really bad. And unfortunately, Old Navy has been reporting negative same-store sales numbers now for the last couple of years. And it doesn't seem to be getting much better. So the new CEO comes in from Mattel certainly has a lot of work to do there.

AKIKO FUJITA: Where does he start? I mean, we just showed those numbers across all the brands that Gap has. What do you prioritize? Because all these brands have struggled.

DAVID SWARTZ: The priorities have to be Old Navy and Athleta, because those really have the most potential. Old Navy should be doing a lot better than it is. In the press release, Gap called out poor activewear sales at Old Navy. And it's just really hard to understand, because activewear has slowed down, but it's still a relatively strong category. And since Old Navy sells a lot of really basic stuff at low prices, it should be doing a lot better in this economy.

And then if you look at Athleta, it does have potential, because women's athleisure is still a very hot area. But Athleta has been underperforming a lot of other retailers that sell women's activewear, certainly Lululemon, but others, too, like Free People Movement, which is owned by Urban Outfitters. Those really have to be the two main priorities for the company.

SEANA SMITH: David, what does the timeline look like for this turnaround? We talk about what he needs to do to revive it. How long is something like that potentially going to take?

DAVID SWARTZ: Well, it's already taken years. That's the reality. And unfortunately, I don't know if Gap can really wait long time for some of these new things to happen. Gap hasn't really been standing still now. It was without a CEO for an entire year. But the board did make some changes. And I mentioned the layoffs, they have a new person in charge of Old Navy now. He was brought in last year.

So they have made some moves. Hopefully, those will start to show some payoff soon. In the meantime, unfortunately, it's really just [AUDIO OUT] to try to stabilize the earnings. But the new CEO Dickson, he has a background in apparel. And he comes from Mattel, where he had success with Barbie. He is certainly going to have to implement something new at Old Navy and Athleta especially to get them back on track.

AKIKO FUJITA: Now, David, let's talk about what we got from Nordstrom. You know, on the one hand, maybe better than expected. But sales in the department store are still below pre-pandemic levels. You look at where Nordstrom Rack is, that also saw a decline, although not as much as the Street expected. And what does it tell you about the mix that Nordstrom has right now? Is it about inventory? Is it about pricing? What are they not quite getting right?

DAVID SWARTZ: Nordstrom certainly does have merchandising problems. It can't seem to do very well with Gap and the full-line stores the same time. It seems like one of them is always struggling. In this court, it looks like Rack had a better quarter than expected. But the Nordstrom full-size stores did not have a great number at all.

The overall sales were a little bit better than expected. But it's really just because expectations are so low, because Nordstrom has been struggling. As with Gap, Nordstrom has been cutting expenses. They did show some improvement in the gross margin in this quarter, which does bode well perhaps for better profitability. But again, like Gap, there really needs to be top line growth at Nordstrom. And we haven't been getting that recently even with the anniversary sale coming in July this year.

SEANA SMITH: David, why do you think Rack has been doing well, especially given this environment? You would think even people at the higher end of the spectrum are starting to trade down. They're looking for those deals. You would think it would set up Rack to have a better quarter than another quarter of sales declines.

DAVID SWARTZ: I think the big problem with Rack is that Nordstrom doesn't seem to know what to do with it. It seems like every quarter, we hear a different story about what Rack's place is in discount retail and its place at Nordstrom. At one time, Nordstrom talked about having higher-priced merchandise at Gap-- I mean, at Rack. Other times, they've said we should have lower priced merchandise at Rack. So it's kind of all over the place.

It seems like the company doesn't really know what to do with it. It certainly should be performing better. And Nordstrom continues to open a lot of Rack stores. So Nordstrom certainly believes it's going to turn around soon. We haven't seen it so much in the numbers, but this quarter was a little bit better, it looks like.

SEANA SMITH: Yeah. I think they have nine stores new stores since the start of the year. All right. David Swartz of Morningstar, thanks.