Gap Inc. Turns Red in First Quarter; Revises Guidance Down

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Hit by higher costs, macro headwinds and choppy waters at Old Navy, Gap Inc. went into the red in the first quarter of this year, reporting a net loss of $162 million, or 44 cents per diluted share, versus a year-ago profit of $166 million, or 43 cents a share.

Operating loss was $197 million in the quarter, versus an operating profit of $240 million a year ago.

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Net sales dropped 13 percent in the quarter ended April 30, to $3.48 billion, down 13 percent from $3.99 billion in the 2021 quarter. Comparable sales were down 14 percent year-over-year.

Net sales growth in the first quarter of fiscal 2022 was negatively impacted by an estimated 5 percentage points related to lapping the benefit of stimulus last year and approximately 3 percentage points from divestitures, store closures and the transition of the company’s European business to a partnership model.

The San Francisco-based specialty retailer joined Target Corp., Walmart Inc., Kohl’s Corp. and other businesses, reporting disappointing first-quarter sales and revising forecasts downward due to the nation’s high rate of inflation and declining demand, particularly for more basic apparel. However, Nordstrom and Macy’s both reported strong first-quarter results, citing increased demand for dresses, wear-to-wear apparel, occasion wear and men’s tailored clothing.

In other results at Gap Inc., online sales declined 17 percent compared to last year and represented 39 percent of total net sales.

Store sales declined 10 percent compared to last year. The company ended the quarter with 3,414 store locations in more than 40 countries, of which 2,825 were company operated.

Gross margin was 31.5 percent, 930 basis points lower than last year.

“Our Q1 results and updated fiscal 2022 outlook primarily reflect industrywide headwinds as well as challenges at Old Navy that are impacting our near-term performance. While we are disappointed to deliver results below expectations, we are confident in our ability to navigate the headwinds and restabilize the Old Navy business in order to deliver continued progress on our long-term strategy,” Sonia Syngal, chief executive officer of Gap Inc., said in a statement.

“We believe that we can navigate this period of acute disruption and build an even more resilient and agile company,” Syngal added. “We remain anchored by our belief in our iconic purpose-led brands — Old Navy, Gap, Banana Republic and Athleta — and are focused on making continued progress against our Power Plan strategy and getting back on track toward delivering growth, margin expansion and value for our shareholders over the long term.”

By division, Old Navy reported net sales of $1.8 billion, down 19 percent compared to last year. Sales in the quarter were negatively impacted by size and assortment imbalances, ongoing inventory delays and product acceptance issues in some key categories. Comparable sales were down 22 percent.

At the Gap division, net sales of $791 million represented an 11 percent decline from last year’s quarter. The brand was slightly impacted by slowed demand stemming from inflationary pressures impacting the lower-income consumer as well as continued inventory lateness to last year. Growth at Gap was also negatively impacted by the COVID-19-related forced lockdowns and slowed overall demand in China. Global and North America comparable sales were both down 11 percent.

On the other hand, Banana Republic reported a 24 percent gain in sales to $482 million, which the company attributed to last year’s relaunch resonating with consumers, particularly in light of the near-term shift into occasion and work-based categories. Comparable sales were up 27 percent.

Athleta reported net sales of $360 million, up 4 percent compared to last year. “The brand continues to make progress in driving awareness and establishing authority in the women’s active and wellness category,” Gap indicated. However, comparable sales were down 7 percent.

“We are revising our fiscal 2022 outlook to reflect the impact of certain factors impacting our near-term performance, including execution challenges at Old Navy, an uncertain macro consumer environment, inflationary cost headwinds and a slowdown in China that is impacting Gap Brand,” said Katrina O’Connell, executive vice president and chief financial officer of Gap Inc. “We expect our performance to improve modestly in the back half of the year and accelerate as we enter fiscal 2023. We believe that our long-term strategy is the right one and we are taking steps to position our brands, platform and people to capitalize on the significant opportunities ahead.”

The company now expects fiscal 2022 revenue to decline in the low to midsingle-digit range versus its previous forecast for low single digits.

Earnings per diluted share are now seen in the 40 cents to 70 cents range, versus the previous guidance of $1.95 to $2.15.

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