Despite a surplus of inventory and weak sales of out-of-date clothing, Gap Inc. reported a surprise quarterly profit on Thursday due to demand for dressier clothing under its Banana Republic brand.

As more people go out to social events and offices, people are choosing suits, dresses, and skirts over casual clothing. Demand for affordable luxury, which Banana Republic specializes in, is also holding steady.

Shares rose 6 per cent in after-hours trading as Gap beat revenue projections and reported that sales improved in July and early August, with lower fuel prices contributing to an increase in discretionary spending.

“The macro environment is testing us with simultaneous shifts in consumer behavior and increased cost pressures,” Gap interim Chief Executive Officer Bob Martin said on an earnings call.

The business, which is in the midst of a CEO transition following Sonia Syngal’s resignation last month, announced that it would spend “more prudently” on marketing, put a hold on hiring, and reduce its spending on technology in an effort to boost profits.

American clothing retailers Kohl’s and Abercrombie & Fitch have issued warnings about steeper discounts to clear out excess casual clothing, which people wore more of during the height of the pandemic.

Even though stocks were 37 per cent higher at the end of the second quarter than they were at the same time last year, Gap recorded an inventory impairment charge of $58 million and stated that it expects them to decline as we approach the new year.

The company beat analysts’ average loss projection of 5 cents for the second quarter to disclose a profit of 18 cents per share. A 9 per cent increase in sales at Banana Republic helped the company’s net revenue of $3.86 billion surpass analysts’ expectations of $3.82 billion, despite Gap’s struggles to move outmoded fashions at Old Navy and other brands.

(Adapted from Latestly.com)