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Gap Warns of Coronavirus Impact After Posting 2019 Loss

Gap Inc. provided fresh guidance for fiscal year 2020 and announced additional leadership changes in reporting fiscal year 2019 results.

In a Nutshell: Gap Inc. joined the chorus of companies warning of the potential negative impact on business from the COVID-19 pandemic, while posting a net loss on a slight uptick in sales in the fourth quarter.

“Due to the evolving coronavirus situation, we are facing a period of uncertainty regarding the potential impact on both our supply chain and customer demand,” incoming Gap Inc. CEO Sonia Syngal said.

“During our 50-year history, Gap Inc. has weathered many storms. We will benefit from our strong balance sheet and cash generation, as well as our important vendor relationships during this current challenging period,” Syngal added. “We are focusing on decisive actions that will ensure we emerge well positioned to compete in the years ahead and I am impressed by how diligently the teams have navigated the events of the past weeks.”

Following the earlier announcement of the appointment of Syngal as CEO, effective March 23, on Thursday the company announced a series of additional leadership changes. Katrina O’Connell, chief financial officer (CFO) of Old Navy, will become the company’s CFO, succeeding Teri List-Stoll, who has served in the role since January 2017. List-Stoll will remain with Gap Inc. for several months to ensure a smooth transition.

Additional leadership appointments include Mark Breitbard to lead the company’s specialty brands, as well as its Asia business and franchise division, and Nancy Green, who will step up to lead the Old Navy brand while the board and management undergo an internal and external search for its next president and CEO. These positions also take effective March 23.​​

Gap issued fresh guidance for fiscal 2020 that included expected diluted earnings per share (EPS) to be in the range of $1.23 to $1.35. Excluding costs related to previously announced plans to restructure the Gap brand specialty fleet, the company expects its adjusted diluted EPS to be in the range of $1.80 to $1.92.

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The fiscal year 2020 guidance largely does not incorporate any estimated impact from the coronavirus outbreak, with the exception of approximately $100 million in sales or 10 cents in diluted EPS for the first quarter-impact in Asia and Europe. The company said it is not currently possible to provide a reasonable estimate of further impact from the evolving outbreak, including potential disruption from any supply chain impacts or reduction in demand in these or other geographies, including the United States. These estimates could materially change if there is meaningful deterioration from current trends.

The company expects both comparable sales and net sales for fiscal year 2020 to be down low-single digits, as it continues the Gap specialty fleet restructuring efforts.

Sales: Net sales for the fourth quarter ended Feb. 1 increased 1 percent to $4.7 billion. For the year, net sales decreased 1 percent to $16.4 billion.

The company’s fourth-quarter fiscal year 2019 comparable sales were down 1 percent compared with a decline of 1 percent last year. Old Navy Global comp sales were flat versus flat last year, Gap Global fell 5 percent compared to negative 5 percent last year, Banana Republic Global comps were flat versus negative 1 percent last year and Athleta comps increased 2 percent versus a 7 percent gain last year.

For fiscal year 2019, the company’s comparable sales were down 3 percent compared with flat last year. Old Navy Global comps fell 2 percent versus a 3 percent gain last year, Gap Global comps declined 7 percent after a 5 percent drop last year, Banana Republic Global comps were down 2 percent versus up 1 percent last year and Athleta’s were up 5 percent versus a 9 percent gain last year.

Earnings: In the fourth quarter, Gap Inc. posted a loss of $184 million compared to income of $276 million a year earlier. For the year, income fell to $351 million from $1 billion in fiscal 2018.

The company’s diluted loss per share was 49 cents for the fourth quarter and diluted earnings per share for fiscal year 2019 were 93 cents. Included in the fourth quarter reported results was an impairment charge of $296 million related to the store assets and operating lease assets of the company’s flagship stores. There were also significant costs incurred in the quarter related to the recently cancelled Old Navy separation, including the disposal of capital assets with no alternative future use and certain obligations under noncancelable contracts. Fourth-quarter separation-related charges were $189 million.

Fourth-quarter gross profit increased 2 percent year over year to $1.67 billion. For the year, gross profit decreased 3 percent compared to last year to $6.13 billion.

Fourth-quarter gross margin was 35.8 percent, an increase of 20 basis points compared with last year. Fiscal year 2019 gross margin was 37.4 percent, a decrease of 70 basis points from a year earlier.

CEO’s Take: Bob Fisher, interim CEO, said: “While fiscal 2019 was a challenging year, I am proud of our teams and their commitment to Gap Inc. Thanks to their efforts, we began to see stabilization in our business in the fourth quarter, driven primarily by improvement in Old Navy’s performance. The current environment presents new challenges, but I am confident in Sonia’s leadership and her ability to deliver the transformational change required.”