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Sign of the Times: Gap Inc. Adds 3.4M Online Customers in Third Quarter

Gap Inc. CEO Sonia Syngal said the retailer’s “Power Plan 2023” is leading to jumps in e-commerce and better customer engagement.

In a Nutshell: Gap Inc. reported flat sales in the third quarter versus last year, supported by 5 percent growth in comparable sales and a 61 percent increase in online sales, offset by a 20 percent decline in store sales, as the company continues to close unprofitable stores.

Gap Inc. said its scaled e-commerce business added over 3.4 million new customers during the quarter, representing 145 percent growth in new online customer acquisition year-over-year. In the quarter, Gap Inc. delivered 25 cents earnings per diluted share, reflecting gross margin improvement compared to the prior year, partially offset by higher operating expenses, including a significant increase in marketing support across all brands.

The company ended the quarter with $2.6 billion in cash, cash equivalents and short-term investments, compared with $1.1 billion at the end of the third quarter in fiscal year 2019, providing ample liquidity to support the company’s long-term growth strategy. Inventory was up 1 percent versus the year-ago quarter. Excluding pack and hold inventory that is being held for introduction into the marketplace in 2021, ending inventory was down about 7 percent, reflecting the company’s focus on working capital management.

Gap said recognizing the continued high level of uncertainty in the marketplace, it was not providing a fiscal year earnings outlook. The recent rise in Covid-19 cases remains a concern, which may impact store traffic, the company said. However, with rapidly growing online sales contribution nd the opportunity for market share gains, the company remains optimistic for the fourth quarter.

Sales: Net sales for the third quarter ended Oct. 31 were flat year-over-year at $3.99 billion.

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Old Navy Global net sales increased 15 percent, with comparable sales up 17 percent. Old Navy continued to experience meaningful acceleration in its online business, as strong customer response to product was bolstered by compelling digital marketing investment, the company said.

The brand’s off-mall and strip real estate locations, which make up approximately 75 percent of the fleet, continue to be an advantage, supporting not only in-store sales, but customers’ omni purchases, through curbside and buy-online-pickup-in-store (BOPIS).

Gap Global net sales were down 14 percent and comparable sales fell 5 percent. Gap said this reflects a reduced store fleet and lower traffic trends, partially offset by strong online performance. The brand remains focused on maximizing online demand through relevant marketing, improved execution and customer engagement, with the brand’s fall marketing campaigns “Stand United” and “Be the Future” generating positive customer response.

Net sales at Banana Republic Global declined 34 percent, a slight improvement versus the second quarter. Comparable sales were down 30 percent. Banana Republic continues to focus on adjusting to consumer preferences and improving inventory mix by shifting away from the brand’s traditional workwear assortment and into casual fashion during the current stay-at-home environment.

Athleta net sales rose 35 percent, while comparable sales were the highest in the brand’s history–up 37 percent–and online contribution remained above 50 percent in the quarter. Athleta continues to benefit from its participation in the highly relevant values-driven active and lifestyle space, strong returns from increased digital marketing investments and a focused product strategy, which is driving a healthy regular price business, the company said. While performance was strong across the brand, masks continued to attract new customers, providing the opportunity to build a relationship across other product offerings.

Earnings: Net income in the quarter fell 32.1 percent to $95 million from $140 million in the year ago period. Operating income declined 20.8 percent to $175 million from $221 million a year earlier.

Gross margin increased 160 basis points versus last year to 40.6 percent. A lower level of promotions contributed to higher product margins in the quarter, and the benefits of lower rent and occupancy, and higher product margin, were partially offset by higher shipping expenses associated with the company’s growth in online sales.

CEO’s Take: Sonia Syngal, CEO of Gap Inc., said: “Our third-quarter results reflect our Power Plan 2023 in action, specifically the strength of our online business, which comprised 40 percent of sales, and our commitment to meeting the shopping preferences of our customers through our leading omni platform. With our teams focused on sales growth and returning to profitability, we’ve made investments in demand generation that are driving engagement, particularly in this dislocated market as customers are looking to trusted brands to provide easy and safe shopping options.”