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Gap Inc. Raises Outlook, Propelled by 65% Digital Growth

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Led by sales gains at Old Navy and Athleta, Gap Inc. delivered its highest second-quarter net sales in more than a decade.

In a Nutshell: Gap Inc. reported second-quarter online sales grew 65 percent versus the second quarter of 2019 and represented 33 percent of the total business. At the same time, store sales declined 11 percent compared to the second quarter of 2019, primarily due to impact from divestitures and strategic closures and Covid closures outside of the U.S.

“Our strong second quarter performance, demand for our purpose-led, billion-dollar lifestyle brands, and ongoing strength of the customer gives us confidence to raise our sales and earnings outlook for the second consecutive quarter,” Katrina O’Connell, executive vice president and chief financial officer, said. “As we fuel profitable growth for the back half and beyond, we are focused on strategic expansion of addressable markets to take share, building customer lifetime value and launching new initiatives to digitally transform Gap Inc. for the future.”

The company raised its reported full-year diluted earnings per share (EPS) guidance to be in the range of $1.90 to $2.05. This outlook reflects charges incurred related to the divestiture of the Janie & Jack and Intermix businesses, as well as estimated charges related to strategic changes in the company’s European business. Excluding these charges, full year EPS on an adjusted basis is expected to be in the range of $2.10 to $2.25.

Gap Inc. said its full-year outlook reflects the impact of expected headwinds in its global supply chain, potential inflationary pressures and current Covid-19 environment.

The company now expects net sales growth for fiscal year 2021 to be about 30 percent versus 2020. This outlook reflects lost revenue related to the company’s decision to change its European operating model, as well as the completed divestitures of Janie & Jack and Intermix.

Operating margin is expected to be approximately 7 percent. Adjusted operating margin guidance has been increased to about 7.5 percent, representing accelerated progress toward the company’s objective of achieving a 10 percent operating margin by the end of 2023.

The company expects third quarter inventory levels to be up mid-single digits relative to the third quarter of fiscal year 2020. Gap Inc. continues to expect capital spending to be approximately $800 million in fiscal year 2021. Consistent with the company’s Power Plan 2023 strategy, capital spending will primarily support higher-return projects including digital, loyalty, and supply chain capacity projects along with investment in store growth for Old Navy and Athleta.

The company continues to expect to open about 30 to 40 Old Navy and 20 to 30 Athleta stores this year, and closes approximately 75 Gap and Banana Republic stores in North America. Gap Inc. ended the second quarter with 3,494 store locations in more than 40 countries, of which 2,937 were company operated.

Ending inventory was up 2 percent compared to the second quarter of 2020. Versus the second quarter of 2019, inventory was down 2 percent.

The company ended the second quarter of fiscal year 2021 with $2.7 billion in cash, cash equivalents and short-term investments. Year-to-date free cash flow, defined as net cash from operating activities less purchases of property and equipment, was $523 million. Fiscal year-to-date capital expenditures were $269 million.

Sales: Net sales for the second quarter ended July 31 were up 5 percent to $4.2 billion compared to 2019. Gap Inc. said due to the impact of Covid-related store closures last year, financial comparisons for the quarter were made primarily against 2019.

Strategic permanent store closures and the recent divestures of the Janie & Jack and Intermix businesses reduced net sales by approximately 8 percent versus 2019. In addition, the company estimated that Covid-related closures in markets outside of the U.S. resulted in about a 2 percent sales decline versus 2019.

Comparable sales were up 3 percent year-over-year and 12 percent versus 2019.

Net sales for Old Navy Global increased 21 percent compared to 2019. Comparable sales were flat to last year and up 18 percent versus 2019. A strong consumer response to a loyalty launch drove customer acquisition, propelling Old Navy’s customer file to an all-time high in the quarter.

Gap Global’s net sales declined 10 percent versus 2019, with permanent store closures resulting in an estimated 14 percent sales decline and international Covid-closures driving an estimated 1 percent decline on a two-year basis. Global comparable sales fell 5 percent year-over-year and increased 3 percent compared to 2019.

In North America, comparable sales growth of 12 percent on a two-year basis was led by strength in key categories, including sleep, active and fleece. Gap’s Partner to Amplify strategy progressed during the quarter as the Gap Home partnership with Walmart launched, reaching millions of Walmart customers. Additionally, the brand completed the first Yeezy Gap Presale with the Round Jacket generating a strong response with 75 percent of pre-order customers being new to the brand.

Net sales at Banana Republic Global were down 15 percent versus 2019, with permanent store closures resulting in an estimated 10 percent decline, and international Covid-closures driving an estimated 1 percent fall-off on a two-year basis. Comparable sales were up 41 percent year-over-year and down 5 percent against 2019.

Net sales and comparable sales reflected meaningful improvement from the first quarter of 2021. Strong execution and product assortment drove brand relevance resulting in lower discounting.

Athleta’s net sales were up 35 percent versus 2019. Comparable sales grew 13 percent year-over-year and 27 percent versus 2019.

Performance lifestyle products performed well as customers went back to work and engaged in more activities while still valuing comfort. Inclusive sizing, which launched last quarter, continues to perform well, building deep customer loyalty.

The brand looks to build on the success of the second quarter with its launch of AthletaWell, an immersive digital platform designed to build loyalty, engagement and a community of empowered women. In addition, following next week’s launch of Athleta online in Canada, the brand will soon be opening stores in Toronto and Vancouver.

Earnings: Net income for the quarter was $258 compared a net loss of $62 million in the same period in 2020 and net income of $168 million in the 2019 period.

Diluted EPS came in at 67 cents. Excluding charges primarily associated with strategic changes to its operating model in Europe, adjusted EPS was 70 cents.

Gross profit increased 17 percent to $1.82 billion, while gross margin was 43.3 percent, an increase of 440 basis points. Key drivers were rent, occupancy and depreciation (ROD) leverage of 330 basis points primarily related to online growth, store closures and renegotiated rent. Merchandise margin expanded 110 basis points due to strong product acceptance and lower discounting, offsetting approximately 130 basis points in higher shipping costs related to strong growth in the company’s online business.

CEO’s Take: CEO Sonia Syngal said: “Our talented teams delivered our highest second quarter net sales in over a decade. Our strategy is driving growth as evidenced by continued strength at Old Navy and Athleta, Gap Brand’s second consecutive quarter of positive two-year comparable sales in North America and momentum gaining at Banana Republic. Stepped-up marketing investments, improved brand management and technology enhancements are paying off as our brand power cuts through.”

“I look forward to our Integrated Loyalty Program and Old Navy’s inclusive shopping experience, BODEQUALITY, taking hold in the back half, both key components of our Power Plan 2023 and important drivers of long-term sustainable growth,” she added.

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