When Gap Inc. executives spoke to analysts on a conference call Thursday to discuss year-end results, they were already anticipating the impact and changes in their supply chain, from factory to consumer sales, of the coronavirus.
But they probably weren’t totally expecting the swift and overwhelming changes in the social order that have now spurred systematic store closings and cancellation of events and mass gatherings that fundamentally impacts the way the company and the retail sector conducts business. However, there was an anticipatory tone in their remarks on the dramatic changes that were about to occur.
“There are two important impacts to consider–demand suppression and supply chain disruption,” Teri List-Stoll, executive vice president and chief financial officer, said. “Over the last year, we’ve made meaningful progress against our migration away from China and currently source about 16 percent of our goods from China, down from 21 percent last year.
“However, we should note that a significant portion of fabric production occurs in mills operated in China supplying vendors outside of China…It appears that much of the mill production will remain largely on schedule,” List-Stoll said. “Additionally, we did not experience any meaningful disruption from factory closures in China at the start of this year.”
List-Stoll said the company’s global sourcing organization is working closely in coordination with logistics and transportation teams to minimize any potential delays or disruption.
The denim supply chain had been disappointed by the decision in January to forego the spinoff of Old Navy from Gap Inc. Many in the denim sector that supplied Old Navy expected a more robust focus and expansion of Old Navy’s jeans profile as an independent company.
“I would say there was some disappointment from mills and manufacturers that expected an expansion of Old Navy after the spinoff,” Robert Antoshak, managing director of Olah Inc., said. “Hopefully, there will still be a renewed focus on Old Navy and an expansion of its denim offerings.”
Keeping the brands together enables the company to leverage “investments in technology and logistics,” Moody’s vice president Christina Boni said.
Last year, Gap Inc. had announced that it was planning to spin off Old Navy–considered its best-performing division–into a separate entity in 2020. In the denim space, it nearly coincided with announced initial public offerings for then-private Levi Strauss & Co., and the Wrangler and Lee unit of VF Corp. into Kontoor Brands, which did go forward.
Considering the unforeseeable scope of current events, the cancellation of the spinoff seems to have been a prudent decision.
In the area of “demand suppression,” China, which represents approximately 3 percent of global net sales, “has been our most impacted region quarter-to-date as a result of store closures and meaningfully reduced traffic trends,” List-Stoll said in last week’s discussion with analysts. “Our businesses in Japan and Europe have also been impacted by store closures and reduced traffic trends.”
Just four days ago, Stoll said Gap Inc. was starting to see some impact on traffic in the U.S. and “while we are unable to reasonably estimate the full impact of coronavirus on the year, based on the reading of the trends we’ve seen in China, Japan and Europe, we currently estimate the Q1 impact in those markets will be a reduction of approximately $100 million in sales. We have not yet quantified an impact for North America.”
The company’s global online business generates more than $4 billion in sales, a profitable business “driving outsized growth with much runway ahead,” Stoll said, “and our sourcing, logistics and IT networks provide us portfolio capabilities and significant scale advantage.”
At Banana Republic, she noted that the brand has focused on reinventing customer access, which included launching a rental subscription, Style Passport and buy online pickup in store.
Sonia Syngal, incoming president and CEO, said based on experience so far with COVID-19 outside the U.S., the company felt prepared to react to changes coming in the U.S. Syngal and Stoll agreed that with the enforcement of social distancing, the company’s large e-commerce business will be a key priority.
On Monday Gap said as a result of the evolving COVID-19 pandemic, it has temporarily reduced store hours for all of its stores across the U.S. and Canada. Old Navy stores will generally operate 11 a.m. to 8 p.m., Monday to Saturday, and 11 a.m. to 6 p.m. on Sunday, while Banana Republic, Banana Republic Factory, Gap and Gap Outlet will be open 11 a.m. to 7 p.m. Monday to Saturday and 11 a.m. to 6 p.m. on Sunday.
The company also said it will close select stores based on guidance from government officials and health authorities, as well as other location-based factors, such as dependence on public transportation. Additionally, the company has implemented enhanced continued pay policies to further support both its full and part time employees in light of this situation.
Of note, on Monday the city of San Francisco, where Gap Inc. is based, issued a directive for residents to shelter in place, a mandate that could force the retailer to follow its retail peers in temporarily shuttering stores.