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Gap Inc. CEO Reveals Plan to ‘Re-Stabilize’ Old Navy

Sonia Syngal laid out a three-pronged plan to “re-stabilize” Old Navy after Gap Inc. saw a net loss of $162 million in the first quarter, as net sales fell 13 percent to $3.5 billion.

In a Nutshell: The CEO cited late-arriving inventory as one of Old Navy’s biggest problems, according to the company’s Thursday earnings call.

“We should have our inventory on time starting June onward, which will allow us to compete in the right seasons for the right moment such as back-to-school or the seasonal shift for fall or holidays,” Syngal told Wall Street analysts, noting that late stock shouldn’t be an issue after the second quarter.

“Sizing imbalances will we be better. We will be better bought to the size curves that our customer wants beginning Q3 onward,” she continued. “I think the fashion choice is improved with Q4 and more into Q1. The team is expecting season-over-season improvement starting with size, size imbalances, and then category and fashion.”

The company ended the quarter with inventory up 34 percent year-over-year to $3.2 billion. “As we think about the lower revenue trend for the balance of the year, we are packing and holding fashion inventory that we think we can sell next year or at a relevant season,” said Katrina O’Connell, chief financial officer for Gap Inc. “And we employed that during the pandemic. So we know how to do that … rather than try and really push that through the system at lower margins. Each of the brands has taken an eye towards packing and holding fashion.”

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Gap Inc. said Thursday that it expects fiscal 2022 revenue to decline in the low to mid-single digit range versus last year.

Gross margin is expected to be in the range of 36.5 percent to 37.5 percent, while operating margin is forecast to range between 1.8 percent and 2.8 percent.

Diluted earnings per share is expected to be in the range of 40 cents to 70 cents. The company continues to expect to open about 30 to 40 stores each for Old Navy and Athleta in fiscal year 2022. As part of its 350-store closure plan, Gap Inc. expects to close about 50 Gap and Banana Republic stores in North America during the year.

“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,” O’Connell said. “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 ended the quarter with cash and cash equivalents of $845 million. Net cash from operating activities was negative $362 million. Free cash flow–defined as net cash from operating activities less purchases of property and equipment–was negative $590 million.

Syngal said the company has big plans in store for Yeezy Gap Engineered by Balenciaga.

The Kanye West-fronted brand’s collection launch earlier this year “drove urgency with customers and generated brand buzz in Q1 with 6.6 billion in media impressions,” she said. “Additionally, you can expect the brand to expand across wholesale and marketplaces later this year.”

Sales: Net sales for the first quarter ended April 30 were down 13 percent compared to last year to $3.5 billion. The company sales were 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.

Comparable sales were fell 14 percent year-over-year, while online sales declined 17 percent and represented 39 percent of total net sales. Store sales declined 10 percent from last year, and the company ended the quarter with 3,414 store locations in over 40 countries, of which 2,825 were company operated.

Old Navy net sales fell 19 percent year over year to $1.8 billion and 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.

Gap net sales were down 11 percent to $791 million, with the brand “slightly impacted by slowed demand stemming from inflationary pressures impacting the lower-income consumer, as well as continued inventory lateness to last year,” the company said. Growth at Gap brand was also negatively impacted by Covid-related forced lockdowns and slowed overall demand in China. Global and North America comparable sales were both down 11 percent.

Banana Republic net sales increased 24 percent to $482 million, as the brand benefitted from last year’s relaunch, “which is resonating with consumers, particularly in light of the near-term shift into occasion and work-based categories,” the company said. Comparable sales were up 27 percent.

“Banana Republic is capitalizing on the current customer shift to occasion wear with women’s suiting, dresses, and skirts growing 62 percent and men’s suit sales nearly doubling versus last year,” Syngal said. “With a record number of weddings set for 2022, the brand is highlighting its best looks and elevated products in a new online wedding and event shop rooted in bright, optimistic color, seasonal neutrals, and luxe fabrics.” It also recently expanded into the baby market.

Net sales at Athleta grew 4 percent to $360 million, with the brand continuing to make progress in driving awareness and establishing authority in the women’s active and wellness category. Comparable sales fell 7 percent.

Earnings: There was a net loss of $162 million in the quarter compared to net earnings of $166 million in the year-earlier period. The quarter saw diluted loss per share of 44 cents compared to diluted earnings per share of 43 cents last year.

Merchandise margins were down 760 basis points versus last year and included approximately $170 million, or 480 basis points, of incremental transitory air freight costs. Higher discounting at Old Navy and inflationary commodity price increases partially offset by the benefit of lower discounting at Banana Republic drove the remaining decline of approximately 280 basis points.

CEO’s Take: “Our Q1 results and updated fiscal 2022 outlook primarily reflect industry-wide headwinds, as well as challenges at Old Navy that are impacting our near-term performance,” Syngal said. “While we are disappointed to deliver results below expectations, we are confident in our ability to navigate the headwinds and re-stabilize the Old Navy business in order to deliver continued progress on our long-term strategy.”

“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.”