Gap Inc., seeing sales decline 18 percent, had a net loss of $62 million last quarter, compared to a profit of $168 million in the year-ago period.
Sales fell to $3.27 billion for the quarter, down from $4 billion in the second quarter a year earlier. For all of 2019, Gap had $16.6 billion in revenues.
On Thursday, Gap’s chief executive officer Sonja Syngal, and chief financial officer, sounded more upbeat about the company’s performance and confident in its portfolio – Old Navy, Gap, Athleta and Banara Republic – than they have in quite awhile. And they also characterized Gap Inc. as being very agile in uncertain times.
“We are a leaner, faster, more focused Gap Inc. I have never felt stronger that (Gap Inc.’s) four brands have the right to grow,” said Syngal, during a conference call with analysts. “I feel great about the extended management team…We win in casual, active and relevant product.”
Among the highlights of the second quarter, which ended Aug.1, comparable sales rose 13 percent, led by a 95 percent online net sales increase year-over-year, reflecting the retailer’s ability to pivot to more digital sales at a time when many shoppers are avoiding stores due to the coronavirus. Store sales fell 48 percent.
The company said Thursday it acquired 3.5 million new customers online during the quarter, representing more than 165 percent growth in new online customer acquisition year-over-year.
In addition, the San Francisco-based speciality retailer, ended the quarter with cash and cash equivalents of $2.2 billion – an increase of more than $1 billion versus the first quarter of this year, putting it a healthy position to continue to navigate through the pandemic.
Syngal said she was impressed how the team moved forward “in every aspect of our business” and with the team’s ability to “chase into products our customers want now…Our business, fundamentally, is healthy.”
Regarding business going forward, she forecast an extended back-to-school season, and has noticed a more even pattern of sales trends this season, compared to the peaks and valleys that typically occur.
She said the back half of 2020 is “unpredictable, but we see opportunities to improve margins, grow sales and invest in the business. Given the high level uncertainty in the current environment, we expect net sales to continue to improve in the back half, versus the second quarter.”
Aside from being negatively impacted by COVID-19 like many retailers, particularly those specializing in selling “non-essentials,” Gap Inc. does have its own set of issues that it’s been grappling with for years. Going forward, the company must continue to downsize the Gap and Banana Republic store fleets; reimagine Banana’s assortment for relevancy; fix Gap brand’s identity crisis and reverse its ever-plummeting sales trends, and manage with higher fulfillment costs stemming from escalating digital sales across the portfolio.
There was no discussion on Gap’s long-term partnership with Kanye West and his Yeezy fashion brand, on a new clothing line called Yeezy Gap, expected to launch in the first half of 2021. The vision, according to West, is to create modern, elevated basics for men, women and kids at accessible price points.
“Our strong performance in the second quarter reflects the customer response to our brands, products and experiences, particularly as we’ve rapidly adapted to the changing environment,” said Syngal in a statement. “We nearly doubled our e-commerce business, with approximately 50 percent online penetration, demonstrating our ability to pivot to a digitally-led culture.
“I’m confident that our purpose-driven lifestyle brands, size and scale, and advantaged digital capabilities are helping us win now and position us for growth in the future.”
The company said its second quarter results improved “meaningfully” compared to the first quarter, with online sales nearly doubling year-over-year as the company leveraged its omni capabilities through its scaled e-commerce platform.
While nearly all stores were temporarily closed due to the COVID-19 pandemic at the start of the second quarter, the company said it worked to quickly reopen stores where permitted beginning early in the period using “industry-leading” safety measures for customers and employees.
The San Francisco-based company ended the quarter with cash and cash equivalents of $2.2 billion, an increase of more than $1 billion versus the first quarter of this year, putting it a healthy position to continue to navigate the pandemic.
Gap has taken several measures to get through the health crisis, among them securing new financing arrangements; realigning inventory purchases to expected demand; reducing expenses; suspending rent payments; extending payment terms; reducing headcount across its corporate functions; reducing capital expenditures; deferring its previously declared first quarter dividend, and suspending its quarterly cash dividend and share repurchases for the remainder of the fiscal year.
After temporarily shutting its stores in March, Gap Inc. began reopening stores in May and as of Aug. 1 had about 90 percent of its global fleet open.
By division, Old Navy Global saw net sales slip 5 percent, reflecting an increase in online sales of 136 percent, offset by a 36 percent decline in store sales. As customers returned to stores, the brand’s off-mall and strip real estate locations, which make up about 75 percent of its fleet, ramped up more quickly than other formats and continue to be an advantage, the company said.
At Gap Global, net sales were down 28 percent, reflecting an increase in online sales of 75 percent, offset by a 55 percent decline in store sales. The corporation continues to downsize the store fleet.
At Banana Republic Global, net sales were down 52 percent, reflecting an increase in online sales of 26 percent, offset by a 71 percent decline in store sales. “Banana Republic continues to focus on taking action to adjust to consumer preferences and improve inventory mix as the shift to casual fashion during the stay-at-home requirements has left the brand’s work wear assortment disadvantaged,” the company said.
Athleta, which continues to gain in popularity and perform well, saw net sales rise 6 percent, reflecting an increase in online sales of 74 percent, partially offset by a 45 percent decline in store sales. “The brand continues to benefit from the highly relevant values-driven active and lifestyle space in which it participates, further fueled by the brand’s deep customer engagement through its powerful omnichannel model,” the company said.
Gross margin was 35.1 percent, a decline of 3.8 percentage points versus last year, as a result of increased shipping expenses as online sales grew and the company leveraged its stores to fulfill strong online demand. Gross margin also reflects rent and occupancy deleverage from the impact of lost sales due to store closures, partially offset by lower promotional activity at Old Navy, Gap and Athleta.
Operating income was $73 million, or 2.2 percent of net sales.
Gap Inc. ended the second quarter with $2.2 billion in inventory, down about 4 percent year-over-year. Excluding pack and hold inventory to be sold in the summer of 2021, ending inventory was down about 10 percent. Excluding pack and hold inventory, the company expects inventory to be down midsingle digits for the remainder of the fiscal year.
The group has 3,814 store locations in 42 countries, of which 3,215 are company-operated. The company expects to close more than 225 Gap and Banana Republic stores globally, net of openings, in 2020, with additional closures expected in 2021.
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