Gap Inc. Sees Red Ink in Q2
● As the company searches for a new CEO, it's cutting costs and getting rid of weak inventory.
Gap Inc., impacted by macro headwinds and persistent issues of its own, fell into the red last quarter off a sharp sales decline.
For the second quarter ended July 30, Gap Inc. lost $49 million, or $0.13 a share. In the year-ago period, the company reported a profit of $258 million, or $0.68 a share.
Net sales of $3.86 billion were down 8 percent compared to last year's $4.2 billion. Comparable sales were down 10 percent year-over-year.
Online sales declined 6 percent and represented 34 percent of total net sales, while store sales declined 10 percent.
The company also reported an operating loss of $28 million versus an operating gain of $409 million in last year's quarter.
While the business was down overall, executives said July and August met expectations. With that, and because of the company's warnings to the Street earlier this year, the company's secondquarter report was not surprising and went over reasonably well with the stock market, which pushed the share price up almost 6 percent, or $0.59, to $10.60 in after-hours trading Thursday.
“This is a pivotal moment in time,” said Bob Martin, Gap Inc.'s executive chairman and interim chief executive officer who last month succeeded Sonia Syngal as CEO until the company can find a permanent replacement. On Thursday, Martin said in his prepared statement that he has “a deep commitment to the company's success and impatience for change.” He also said during the conference call with Wall Street analysts that the board is actively evaluating candidates and focused on someone who can move the company from a defensive to offensive posture.
“Having navigated the global retail industry across brands and markets, I am not approaching this work from the sidelines,” he said in his statement. “We are taking actions to better optimize profitability and cash flow in the near term, reducing operating costs as well as impairing unproductive inventory. While our elevated inventory and pressured margins are current realities against unsettled market conditions, they do not define our ability to capitalize on Gap
Inc.'s strengths to win.
“Gap Inc.'s iconic brands, powerful assets, well-established values and scaled omniplatform are central to our strategic direction. Our team has the capabilities to deliver what our customers, and our shareholders, expect — what's needed for profitable growth. Importantly, as we adopt behaviors that enable sustainable change, I'm confident we will unleash our potential and drive value creation over the long term.”
The company in July also named former Walmart Inc. executive Horacio “Haio” Barbeito president and CEO of Old Navy, succeeding Nancy Green, who left in l ate April.
Old Navy is looking to recover from sizing and assortment imbalances, but executive vice president and chief financial officer Katrina O'Connell said during the call with analysts that core sizes will be back in stock for fall.
Old Navy, Gap and Athleta are currently confronting shifting consumer preferences towards dressier, going-out and wear-towork styles, and less spending on the active and casual merchandise, which the three brands concentrate on.
On the other hand, Banana Republic, where the styles and quality of garments have been elevated this year, has been capitalizing on the shift in consumer trends this year, and is showing gains, finally, after years of declines.
Still, inventories in total for the corporation were up 37 percent at the end of the second quarter. According to O'Connell, inventory levels will moderate by the end of the third quarter and should be negative on a year-over-year basis heading into 2023. “For the near term, inventory is higher than we would like it to be,” she said. “We are taking aggressive actions over the next six months to really get our inventories down…The industry is awash in inventory.” The company is buying less merchandise in advance, getting vendors to hold more inventory that can be “chased” by merchants as needed.
O'Connell cited a general shift away from cozier categories like active, fleece, T-shirts and shorts. Regarding Gap Inc.'s softer sales, “It's less about product not being great and more about the consumer wanting to spend more on pants, dresses, dressier denim, things to wear out to parties or to work.” The company, she said, is working hard to pivot from being too weighted toward casual, to more going-out categories and versatile day-to-evening looks, to meet the shifting consumer demand in the back half of the year, though she emphasized, “Don't expect to us broadly pivot the DNA of the brands.”
She also said that at Old Navy, the pricing structure could lean more on “good” and “better” ranges, and less so on “best” prices.
The $16.7 billion Gap Inc. has had a sustained inability to pull itself out of the doldrums. Its three biggest brands — Old Navy, Gap and Banana Republic — have all been faltering for some time, though Old Navy only in the last few seasons after a series of missteps over sizing and fashion miscues, and Banana Republic is showing signs of improvement with better styles. Syngal rose to CEO in March 2020, just at the outbreak of the pandemic, and at a particularly difficult time to be running a retail business. Gap Inc.'s Athleta brand for activewear has been generally performing well.
“We have four strong brands and leverage in the portfolio to deliver over the long term, however our recent execution challenges combined with the uncertain macro trends requires us to manage the levers in our control and take the actions necessary to drive improvement across our entire business,” said O'Connell, in a statement. “In the near term, we are taking actions to sequentially reduce inventory, rebalance our assortments to better meet changing consumer needs, aggressively manage and reevaluate investments, and fortifying our balance sheet. While we have work to do, we believe these are the right initial steps to position Gap Inc. back on its path toward growth, margin expansion and delivering value for our shareholders over the long term.”
She said that “given the actions the company has underway and in the midst of a CEO transition, combined with the uncertain macro-environment, the company is withdrawing its prior fiscal 2022 outlook.”
By division, net sales at Old Navy reached $2.1 billion, down 13 percent compared to last year. “Sales in the quarter were negatively impacted by size and assortment imbalances, ongoing inventory delays, product acceptance issues in some key categories as well as slowing demand stemming from the lower-income consumer,” the company indicated. Comparable sales were down 15 percent.
At the Gap brand, net sales were $881 million, down 10 percent compared to last year. “The brand was impacted by category mix imbalances during the quarter. The decrease in net sales was also driven by strategic store closures. In addition, the Gap outlet business is experiencing near-term softness stemming from inflationary pressures impacting the lower-income consumer,” Gap Inc. said in its statement.
Banana Republic reported net sales of $539 million, up 9 percent compared to last year. “The brand maintains its focus on delivering quality product through a differentiated experience. It continues to capitalize on the current shift in consumer trends while realizing ongoing benefits since last year's brand relaunch. Comparable sales were up 8 percent,” the company stated.
Athleta reported net sales of $344 million, up 1 percent compared to last year. “While the brand continues to make progress in driving awareness and establishing authority in the women's active and wellness category, it is experiencing softness related to the shift in consumer preference from athleisure to occasion and work-based categories as well as modest spring/summer product acceptance challenges,” the company indicated. Comparable sales were down 8 percent.
Global comparable sales were down 7 percent. North America comparable sales were down 10 percent. The company ended the quarter with 3,390 store locations in more than 40 countries, of which 2,799 were company operated.