Gap Inc. Reports First Quarter Results

Gap Inc. (NYSE: GPS), the largest specialty apparel company and second largest apparel e-commerce business in the U.S., which operates a portfolio of lifestyle brands, including Old Navy, Gap, Athleta and Banana Republic, reported its financial results for the first quarter of fiscal year 2020, ending May 2.

The Company’s first quarter results were impacted by the temporary closure of approximately 90% of its global store fleet starting on March 19. During the quarter, the Company enacted several measures to strengthen its cash position, as well as secured additional financing early in the second quarter, putting the Company in a solid financial position to weather the pandemic. The Company also leveraged its omni capabilities to continue to serve customer demand online through its scaled e-commerce platform.

“Our teams’ ability to pivot quickly and lean into our strong online business resulted in an encouraging 40% online sales growth in April. While net sales and stores sales continued to reflect material declines in May as a result of closures, we saw over 100% growth in online sales during the month,” said Sonia Syngal, President and CEO of Gap Inc. “This online momentum, enabled by new omni-capabilities that have expanded the way customers can shop with us, leaves us well-positioned to fuel our brands going forward.”

Syngal added, “Today we have more than 1,500 stores open in North America, ahead of plan, and as stay at home restrictions ease in many markets, we expect to have the vast majority of our North American stores re-opened in June. We are optimistic that the actions we’ve taken will provide a stable foundation as we navigate near-term uncertainty and refashion Gap Inc. for long-term growth.”

First Quarter 2020 Results
The Company noted first quarter results reflect the significant impacts of the global pandemic, including lost sales and corresponding merchandise margin from the temporary store closures, a non-cash impairment charge of $484 million related to the Company’s store assets and operating lease assets, as well as a $235 million non-cash inventory impairment charge.

The Company’s first quarter fiscal year 2020 net sales were down 43% year-over-year, as solid momentum in the first 35 days of the quarter was more than offset by meaningful deceleration in demand after temporary store closures beginning in mid-March. In response, the Company continued to serve customer demand online through its scaled e-commerce platform, which at over $4 billion in net sales in fiscal year 2019, represented about one quarter of the Company’s sales for that fiscal year. The Company’s first quarter 2020 online sales channel increased 13% compared to the first quarter fiscal year 2019, with the Company noting continued acceleration of online growth following the end of the quarter. The Company’s first quarter 2020 store sales decreased 61% compared to the first quarter fiscal 2019, driven by temporary store closures.

Additionally, the Company is not providing comparable sales results for the quarter because the metric is not meaningful as a result of temporary store closures in the period. Instead, the Company has provided net sales which consists of store sales and online sales, by brand. Store sales primarily include sales made at Company-operated and franchise stores. Online sales primarily include sales made through the Company’s online e-commerce channels, including ship-from-store sales, buy online pick-up in store sales, and order-in-store sales. First quarter net sales details appear in the tables at the end of this press release.

Net sales by brand for the first quarter 2020 compared to the first quarter 2019 were as follows:
*Old Navy Global: Net sales were down 42%; store sales were down 60% with online sales up 20%. Since the onset of the COVID-19 pandemic, Old Navy has seen a meaningful acceleration in its digital business. The Company noted it expects the off-mall, strip real estate that makes up approximately 75% of the fleet to be an advantage as customers return to stores and expects traffic in these locations to ramp up more quickly than other formats.
*Gap Global: Net sales were down 50%; store sales were down 64% with online sales down 5%. Prior to the onset of the pandemic, Gap brand performance continued to be pressured by inconsistent execution of product and marketing messages. However, the Company noted the brand did experience steady improvements in its online performance throughout the quarter, attributable to the Company’s strategy to migrate customers online as the brand’s fleet rationalization efforts continue.
*Banana Republic Global: Net sales were down 47%; store sales were down 61% with online sales down 2%. While the move to casual fashion during the stay-at-home requirements has benefited other brands in Gap Inc.’s portfolio, this shift left Banana Republic disadvantaged in its product mix. As a result, Banana Republic is taking aggressive action to adjust to consumer preferences and improve inventory mix.
*Athleta: Net sales were down 8%; store sales were down 50% with online sales up 49%. Customer response to Athleta was strong given the values-driven active and lifestyle space the brand participates in as well as the brand’s deep customer engagement through its powerful omni-channel model.

Gross margin was 12.7%, reflecting a $235 million non-cash inventory impairment charge, rent and occupancy deleverage associated with store closures, and increased promotional activity. As previously disclosed, beginning in April, the Company suspended rent payments for closed stores. While the Company remains in active and ongoing discussions with its landlords, it noted that first quarter gross margin reflects the cost of rent payments, which are being accrued for accounting purposes.

Operating loss was $1.2 billion. This reflects the decline in gross margin, as well as a non-cash impairment charge of $484 million related to the Company’s stores to reduce the carrying amount of the store assets and the corresponding operating lease assets to their fair values, which have dramatically declined as a result of the pandemic. The Company noted that as part of its ongoing specialty fleet optimization efforts, the Company has undertaken a strategic review of its real estate portfolio to further advance its long-term strategic priorities that include a smaller, healthier fleet, particularly as it relates to its Gap brand and Banana Republic specialty fleets.
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