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Gap Posts $932 Million Net Loss, But ‘Well-Positioned’ to Fuel Growth, CEO Says

Online sales were a bright spot in a dismal quarter for Gap Inc., which posted a net loss of $932 million and a 43 percent sales decline.

In a Nutshell: Gap Inc. said its first-quarter results were impacted by the temporary closure of approximately 90 percent of its global store fleet starting on March 19.

During the quarter, the company instituted several measures to strengthen its cash position and secured additional financing early in the second quarter, putting the company in what it described as “a solid financial position to weather the pandemic.” The company, which operates a portfolio of lifestyle brand chains, including Old Navy, Gap, Athleta and Banana Republic, also leveraged its omnichannel capabilities to continue to serve customer demand online through its scaled e-commerce platform.

The company noted that first-quarter results reflected the significant impacts of the global pandemic, including lost sales and corresponding merchandise margin from the temporary store closures, a non-cash impairment charge of $484 million related to its store assets and operating lease assets, as well as a $235 million non-cash inventory impairment charge.

Early in the second quarter, Gap Inc. issued $2.25 billion of senior secured notes, a portion of which will be used to redeem previously issued $1.25 billion in unsecured notes due April 2021. The company also repaid $500 million borrowed under its prior revolving credit facility, while also securing a $1.87 billion asset-based revolving credit facility that replaced its existing unsecured revolving credit facility. As of Thursday, that has not been accessed and remains available for use. The company currently believes this new capital structure provides sufficient liquidity to navigate the COVID-19 pandemic.

As part of its response to the pandemic, the company plans to reduce its capital expenditures for the fiscal year by approximately 50 percent and now expects capital spending to be approximately $300 million for fiscal year 2020, which includes about $30 million of expansion costs related to its Ohio distribution center.

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Given the high level of uncertainty in the current environment, the company said it was not providing fiscal year net sales or earnings outlooks.

Sales: Net sales for the first quarter ended May 2 were down 43 percent year-over-year, as solid momentum in the first 35 days of the quarter was more than offset by meaningful deceleration in demand after temporary store closures beginning in mid-March.

In response, the company continued to serve customer demand online through its scaled e-commerce platform. First-quarter online sales increased 13 percent compared to the first quarter fiscal year 2019, with continued acceleration of online growth since the end of the quarter.

Gap Inc.’s first-quarter store sales decreased 61 percent compared to the first quarter fiscal 2019, driven by temporary store closures. The company said it was not providing comparable sales results for the quarter because the metric was not meaningful as a result of temporary store closures in the period.

Net sales for Old Navy Global were down 42 percent, with store sales falling 60 percent and online sales up 20 percent.

Since the onset of the COVID-19 pandemic, Old Navy has seen a meaningful acceleration in its digital business. The company noted it expects the off-mall, strip real estate that makes up approximately 75 percent of the fleet to be an advantage as customers return to stores and expects traffic in these locations to ramp up more quickly than other formats.

Gap Global net sales fell 50 percent, as store sales were down 64 percent and online sales declined 5 percent. Prior to the onset of the pandemic, Gap brand performance continued to be pressured by inconsistent execution of product and marketing messages. However, the company noted the brand did experience steady improvements in its online performance throughout the quarter.

Banana Republic Global net sales were down 47 percent, with store sales off 61 percent and online sales dipping 2 percent. While the move to casual fashion during the stay-at-home requirements benefited other brands in Gap Inc.’s portfolio, this shift left Banana Republic disadvantaged in its product mix. As a result, Banana Republic is taking aggressive action to adjust to consumer preferences and improve inventory mix.

Athleta net sales declined 8 percent–store sales were down 50 percent, but online sales rose 49 percent. Customer response to Athleta was strong given its values-driven active and lifestyle space, as well as the brand’s deep customer engagement through its strong omnichannel model.

Earnings: Gap Inc. posted a net loss of $932 million in the quarter compared to net income of $227 million in the year-ago period. It also had an operating loss in the quarter was $1.2 billion, reflecting a decline in gross margin, as well as a non-cash impairment charge of $484 million related to the company’s stores to reduce the carrying amount of the store assets and the corresponding operating lease assets to their fair values, which have dramatically declined as a result of the pandemic.

Gross margin in the period was 12.7 percent, reflecting a $235 million non-cash inventory impairment charge, rent and occupancy deleverage associated with store closures and increased promotional activity. Beginning in April, the company suspended rent payments for closed stores. While the company remains in active and ongoing discussions with its landlords, it noted that first-quarter gross margin reflects the cost of rent payments that are being accrued for accounting purposes.

CEO’s Take: Sonia Syngal, president and CEO, said: “Our teams’ ability to pivot quickly and lean into our strong online business resulted in an encouraging 40 percent online sales growth in April. While net sales and stores sales continued to reflect material declines in May as a result of closures, we saw over 100 percent growth in online sales during the month. This online momentum, enabled by new omni-capabilities that have expanded the way customers can shop with us, leaves us well-positioned to fuel our brands going forward.

“Today we have more than 1,500 stores open in North America, ahead of plan, and as stay-at-home restrictions ease in many markets, we expect to have the vast majority of our North American stores re-opened in June,” Syngal added. “We are optimistic that the actions we’ve taken will provide a stable foundation as we navigate near-term uncertainty and refashion Gap Inc. for long-term growth.”