Key takeaways:

• Gap dramatically cut its earnings outlook as a steep decline in Old Navy sales weighed on results for the fiscal first quarter.
• The Old Navy's lower-income consumer's target customer is beginning to feel pinched by inflation, Gap Chief Executive Officer Sonia Syngal told CNBC.
• "We're dealing with explosive customer signals — whether last year in Covid or post-Covid behaviors," said Syngal.

Gap Inc. on Thursday cut its earnings guidance for the entire year as it said a drop in fiscal first-quarter sales, which were pulled down by its Old Navy business.

An imbalanced combination of clothing sizes, continuous inventory delays, and an uptick in price-lowering promotions dent Old Navy's performance during the quarter.

The Old Navy's target consumer, the lower-income customer, is beginning to feel pinched by inflation, Chief Executive Officer Sonia Syngal told CNBC. She said in a phone interview that shoppers also have fast shifted from purchasing active clothes and fleece hoodies — Old Navy's "sweet spot" — to looking for party dresses and office clothes.

"We're dealing with volatile customer signals — whether last year in Covid or post-Covid behaviors," stated Syngal. "Over time, we'll see consumer preference for product classes balanced out."

Gap stock fell almost 20% in extended trading.