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Gap Inc. Sees Encouraging Trends in Q2 Comp Sales

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While Gap Inc. posted a net loss and a year-over-year decline in its fiscal second quarter, comp sales grew 13 percent.

In a Nutshell: Gap Inc. said 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 up e-commerce platform.

The company said it believes it is in a solid financial position to navigate through the ongoing pandemic and continue investing in its business. The company delivered positive operating income and improved its cash balance by more than $1 billion compared to the first quarter, ending the quarter with a cash and cash equivalents balance of $2.2 billion.

While nearly all stores were temporarily closed due to the Covid-19 pandemic at the start of the second quarter, the company worked to quickly reopen stores where permitted beginning early in the quarter using industry-leading safety measures for customers and employees.

Gap Inc. ended second quarter with $2.2 billion in cash and cash equivalents compared to $1.1 billion at the beginning of the quarter. Strong cash flow in the quarter reflected meaningful improvement in sales trends compared to the first quarter, as well as the benefit from measures the company implemented in the first quarter to strengthen its cash position in response to the global pandemic.

Gap Inc. ended second quarter with $2.2 billion in inventory, down about 4 percent year-over-year, reflecting the company’s focus on aligning inventory with customer demand. Excluding pack and hold inventory that is being reserved for introduction into the marketplace in the summer of 2021, ending inventory was down about 10 percent.

Sales: Net sales were down 18 percent year-over-year to $3.28 billion, reflecting a 95 percent increase in online sales, offset by a 48 percent decline in store sales, which were impacted by partial closures during the quarter.

During May, Gap Inc. began reopening stores previously closed as a result of the Covid-19 pandemic, with approximately 90 percent of its global fleet open as of Aug. 1. Second-quarter comparable sales were up 13 percent, driven by the strength of its e-commerce business, which added over 3.5 million new customers during the quarter.

Old Navy Global net sales were down 5 percent, with an increase in online sales of 136 percent offset by a 36 percent decline in store sales. Comparable sales were up 24 percent.

The company said Old Navy continued to experience meaningful acceleration in its online business, as strong customer response to product was further bolstered by compelling and relevant digital marketing investment. As customers returned to stores, the brand’s off-mall and strip real estate locations, which make up approximately 75 percent of the brand’s fleet, ramped up more quickly than other formats and continue to be an advantage.

Gap Global net sales fell 28 percent on a 75 percent increase in online sales offset by a 55 percent decline in store sales. Comparable sales were up 12 percent. As the brand’s fleet rationalization efforts continue, the brand remains focused on maximizing online demand through relevant marketing, improved execution and customer engagement, the company noted.

Net sales for Banana Republic Global dropped 52 percent, reflecting a 26 percent increase in online sales and a 71 percent decline in store sales. Comparable sales were down 27 percent.

The company said 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 workwear assortment disadvantaged.

Athleta net sales rose 6 percent, with a 74 percent increase in online sales partially offset by a 45 percent decline in store sales. Comparable sales were up 19 percent.

The brand continues to benefit from the highly relevant values-driven active and lifestyle space in which it participates, further fueled by its deep customer engagement through its strong omnichannel model, the company said.

Earnings: The company reported a net loss of $62 million in the quarter compared to net income of $168 million in the prior-year period.

Gross margin was 35.1 percent, a decline of 3.8 percentage points versus last year, as a result of increased shipping expense 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.

CEO’s Take: Sonia Syngal, CEO, said: “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. 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.”

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