Gap Profits Fall 32.1 Percent on Flat Sales
Gap Inc.’s profits fell in the third quarter — and more than Wall Street anticipated — but the company achieved a certain balance in sales as e-commerce helped offset store closures.
The company also tapped Sandra Stangl as president and chief executive officer of Banana Republic and named Asheesh Saksena to the newly created corporate post of chief growth officer.
The broader story at the retailer, which owns Old Navy and Athleta as well as its namesake brand, was one of digging back out of the pandemic while also preparing for the future.
Third-quarter net income fell 32.1 percent to $95 million, or 25 cents a share, from $140 million, or 37 cents, a year earlier. The bottom line, however, fell 7 cents shy of the 32 cents analysts projected, pressuring Gap shares, which fell 9.7 percent to $24.22 in after-hours trading.
Sales for the three months ended Oct. 31 were flat at $4 billion, with the decline from store closures offset by 5 percent comparable sales growth and a 61 percent boost in online sales. (Gap expects sales for the rest of the year to be “equal to or slightly higher than last year.”)
“Our third-quarter results reflect our Power Plan 2023 in action — specifically the strength of our online business, which comprised 40 percent of sales, and our commitment to meeting the shopping preferences of our customers through our leading omni platform,” said Sonia Syngal, who became ceo of Gap in March. “With our teams focused on sales growth and returning to profitability, we’ve made investments in demand generation that are driving engagement, particularly in this dislocated market as customers are looking to trusted brands to provide easy and safe shopping options.”
On a conference call with analysts Syngal sought to take charge of the company’s legacy and shape it for the future, referring to the days when Gap was the casual leader and sketching out a future with a portfolio of brands that each repositions to play to their strengths while leading with purpose.
“Since the beginning we have led the casualisation of American wardrobe,” she said. “Whether it was introducing khakis and the notion of casual Fridays to the New York Stock Exchange in the late 90s, or a modern version of the Gap khakis making the headlines during election coverage earlier this month — it’s about more than just a pair of pants. It’s about relevance.”
Syngal said the company’s four billion-plus dollar brands are leveraging “their brand power to win in a dislocated market by delivering the right product at the right time, at a time when trust matters most. Each brand lead with their values and their full campaigns.”
“They invested dollars and increased digital marketing to drive traffic and for the first time in 10 years, all of our brands are on TV, and it paid off,” she said.
The company picked up more than six million customers in the third quarter for a total of 176 million and is working now to strengthen its relationships with shoppers in new ways.
In some cases, that means connecting online as stores close and the brands rightsize their approach.
“One of the biggest value drivers of our power plan 2023 is our real estate restructuring strategy, largely pointed at closing select stores across Gap and Banana Republic,” Syngal said. “Our strategy is rooted in moving away from traditional malls and focusing on more advantageous location to better meet customer needs.”
The retailer ended the third quarter with a $2.6 billion stockpile of cash, cash equivalents and short-term investments — a cushion that expanded from $1.1 billion a year ago, when COVID-19 closures were nowhere on the radar.
Katrina O’Connell, chief financial officer, noted the company has strong enough cash flow to continue to invest in marketing to support its brands as well as digital capabilities to drive the online business.
The company has also spent over $100 million on health and safety measures in its stores — but the focus on the web is only growing.
“We target to have 50 percent of our sales by the end of 2023 being online…and, beginning in 2021, returning to a normalized level of capital expenditures, focused on investments to further our capabilities, including digital and technology capabilities and distribution capacity,” O’Connell said on the call.
She said next year would be “a rebound year” that would see profitable growth over 2020.
“We anticipate the structural changes we’re making now and into next year will set up the company to deliver on a consistent basis,” she said.
The company’s plan has it driving growth at the higher-margin Old Navy and Athleta brands, while being more efficient at Gap, which is also seen driving more interest with the forthcoming Yeezy partnership.
In the third quarter, Athleta led the portfolio, with sales up 35 percent, followed by the much larger Old Navy, which increased 17 percent.
Sales for the Gap division fell 14 percent and the long-struggling Banana Republic was down 34 percent.
But starting next month, the Banana Republic business is getting a fresh set of eyes on it with Stangl joining.
Stangl spent 23 years at Williams Sonoma, where she rose to the position of president, Pottery Barn Brands and launched Pottery Barn Kids and Pottery Barn Teen. Stangl also served as president, chief merchandising and new business development officer for Restoration Hardware.
As chief growth officer, the company said Saksena “will assess value creation opportunities to ensure consistent growth across the company.” He starts in January and was most recently president of Best Buy Health, where he oversaw the brand’s strategic diversification into digital health.
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