“Like so many others in our industry, we are managing through elevated inventory levels as a result of changing demand trends and shifting consumer preferences,” said CFO Katrina O’Connell.

Gap Inc.  (GPS) – Get Gap Inc. (The) Report shares moved firmly Friday trading following a surprise second quarter profit that offset a muted near-term outlook linked to bulging inventories and softer clothing demand.

Gap, which also operates the Old Navy and Banana Republic brands, pulled its full-year guidance for earnings of between 30 cents and 60 cents per share amid what it called a “testing” macro environment paired with “shifts in consumer behavior” that favors formal attire over many of its casual alternatives.

For the three months ending in July, Gap said revenues fell 3.3% from last year to a Street-beating $3.68 billion, helped in part by stronger-than-expected sales from Banana Republic, while earnings were pegged at 18 cents per share, well ahead of forecasts for a 5 cents per share loss.

Gap’s inventory build, however, matched that of other U.S. retailers, rising 37% from last year and leading to a $58 million impairment charge. The group said further discounts will likely be needed to shift the excess before the end of the year, pressuring margins along the way.

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“Like so many others in our industry, we are managing through elevated inventory levels as a result of changing demand trends and shifting consumer preferences,” CFO Katrina O’Connell told investors on a conference call late Thursday. 

“While we are taking actions to rightsize inventory, we are also mindful of the uncertain and increasingly promotional environment clouding our visibility,” she added. “We entered the third quarter with elevated levels of inventory and expect inventory growth to moderate as we move throughout the year as our actions take hold, we reduce receipts and begin to anniversary higher in-transit levels last year.”

Gap shares were marked 7.5% higher in pre-market trading to indicate a split-adjusted opening bell price of $10.76 each.

Earlier this summer, CEO Sonia Syngal left the retailer after only two years at the helm, ceding her position to Bob Martin. Haio Barbeito, formerly the head of Walmart  (WMT) – Get Walmart Inc. Report Canadian unit, was named CEO at its Old Navy brand.

Gap’s expected markdowns echo muted near-term outlooks for the U.S. retail sector, which is being pressured by freight costs, supply chain delays, a pullback in discretionary spending and heavy discounting from Walmart and Target  (TGT) – Get Target Corporation Report.

Earlier this week, Nordstrom  (JWN) – Get Nordstrom Inc. Report slashed its full-year profit forecast following a mixed set of second quarter earnings and softening consumer spending heading into the summer months.

Prior to that, Macy’s  (M) – Get Macy’s, Inc. Report trimmed its full-year profit forecast amid the extended impact of inflation on domestic discretionary spending.