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Gap Inc. Reports $16 Million Q4 Net Loss

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Gap Inc. reported net sales for the fourth quarter dipped 3 percent to $4.5 billion compared to 2019 on store closures and divestitures.

In a Nutshell: Gap Inc., with a portfolio of billion-dollar lifestyle brands, including Old Navy, Gap, Banana Republic and Athleta, said Thursday that fiscal year 2022 revenue growth is expected in the low single-digit range versus fiscal year 2021, with first quarter net sales forecast to be down mid to high-single digits versus the first quarter of 2021.

The company projected diluted earnings per share (EPS) to be in the range of $1.95 to $2.15. Excluding a net benefit expected from international initiatives, the company expects its adjusted diluted EPS in the range of $1.85 to $2.05. Gap Inc.

The company expects to deliver an operating margin of 6.3 percent to 6.8 percent. First quarter ending inventory is expected to be up in the mid-20 percent range relative to the first quarter of fiscal year 2021 as a result of earlier booking to offset longer in-transit times.

Fiscal year 2021 ending inventory was up 23 percent year-over-year, with about 15 percent of the growth driven by longer in-transit times. The remaining increase was driven by higher average unit cost resulting from air expense that the company expects to sell through in the first half of fiscal 2022 and from product mix shifts into higher cost items.

The company expects capital spending to be approximately $700 million in fiscal year 2022. Capital spending is expected to primarily support growth investments including digital, loyalty, and supply chain capacity projects, along with investment in store growth for Old Navy and Athleta.

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Gap Inc. expects to open about 30 to 40 stores each for Old Navy and Athleta in fiscal year 2022. In addition, as part of its 350-store closure plan, it expects to close about 50 to 60 Gap and Banana Republic stores in North America during the year.

“As we transition to 2022, we are focused on delivering value to shareholders through our economic model, enabled by the progress we’ve made against our strategy through repositioning unprofitable areas of the business and building brand relevance,” said Katrina O’Connell, executive vice president and chief financial officer of Gap Inc. “Our primary focus is on the long-term health of the business and delivering profitable growth year after year. We are clear on our 2022 priorities and are acutely focused on realizing increased operational efficiency and, most importantly, driving sustainable, profitable growth.”

The company ended the year with $900 million in cash and cash equivalents, and 3,399 store locations in more than 40 countries, of which 2,835 were company operated.

Sales: Net sales for the fourth quarter ended Jan. 29 were down 3 percent to $4.5 billion compared to 2019. The company said due to the significant impact of Covid-19 on prior-year figures, financial comparisons were made primarily to the same period in fiscal year 2019.

Strategic permanent store closures and divestitures reduced net sales by approximately 9 percent versus 2019. Online sales grew 44 percent compared to the fourth quarter of 2019 and represented 43 percent of the total business. Fourth quarter comparable sales were up 3 percent versus 2019 and year-over-year.

Old Navy net sales in the period were muted in part due to supply chain impacts, up 2 percent versus 2019, with comparable sales flat from two years earlier.

Gap net sales declined 13 percent versus 2019, with permanent store closures contributing an estimated 17 percentage points of decline. Global comparable sales increased 3 percent, with North America comparable sales up 12 percent against the fourth quarter of 2019.

Banana Republic fourth quarter net sales declined 11 percent versus 2019, with permanent store closures contributing an estimated 10 percent of the decline. Comparable sales were down 2 percent against the 2019 period.

Athleta net sales in the quarter fell 52 percent from 2019, with comparable sales up 42 percent.

For the year, net sales rose 2 percent to $16.7 billion versus 2019. Strategic permanent store closures and divestitures reduced net sales by about 7 percent against 2019. Online sales grew 57 percent from 2019 and represented 39 percent of total net sales.

Comparable sales for the year grew 8 percent versus 2019 and were up 6 percent year-over-year. The comparable sales calculation reflects online sales and comparable sales days in stores that were open.

Old Navy crossed $9 billion in net sales in the year, up 14 percent from 2019, with comparable sales up 12 percent in the same period.

Gap net sales were down 12 percent in the year compared to 2019, with permanent store closures reducing sales by an estimated 15 percent. Global comparable sales were up 2 percent, with North America comparable sales up 12 percent from 2019.

Banana Republic 2021 net sales fell 18 percent compared to 2019, with permanent store closures reducing sales by an estimated 10 percent. Comparable sales were down 9 percent against 2019.

Athleta net sales rose 48 percent in the year compared 2019, with comparable sales up 39 percent in the same comparison.

Earnings: The company reported a net loss $16 million in the quarter compared net income of $234 million in the prior year and a loss of $184 million in fiscal 2019.

The company’s diluted loss per share for the fourth quarter was 4 cents. Excluding charges related to strategic changes in the company’s European business, the fourth quarter adjusted diluted loss per share was 2 cents.

Gross margin was 33.7 percent in the quarter, 260 basis points lower than 2019 adjusted gross margin driven by merchandise margins down 500 basis points versus 2019 due to nearly 600 basis points of estimated air freight costs that were partially offset by higher average unit retails through lower discounting.

For the year, net income was $256 million compared to a net loss of $665 million in fiscal 2020 and net income of $351 million in 2019.

Diluted EPS was 67 cents for the year. Excluding fees associated with restructuring the company’s long-term debt, as well as charges related to divestiture activity and strategic changes in the company’s European business, adjusted diluted EPS was $1.44.

Gross margin of 39.8 percent improved 220 basis points versus 2019 driven by merchandise margins down 100 basis points versus 2019 as average unit retail growth was offset by an estimated 240 basis points of air freight expense.

CEO’s Take: Sonia Syngal, CEO of Gap Inc., said: “After two years of restructuring, including divesting smaller non-strategic brands, transitioning our European market to an asset-light partnership model and shedding underperforming North American stores, our core business is strong and we are poised for balanced growth across our four billion-dollar lifestyle brands. As our teams address near-term disruption from the acute headwinds that muted our fourth quarter performance, we are confident in our ability to execute against our long-term strategy, capitalizing on our investments in demand-generation, customer loyalty and artificial intelligence to accelerate profitable growth.”