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It Ain’t Yeezy Being Gap

After a surprising third quarter, Gap Inc. stock rose nearly 6 percent early Friday after the company beat Wall Street’s quarterly revenue expectations. But the apparel parent of its namesake brand as well as Old Navy, Banana Republic and Athleta, anticipates that total company net sales could be down mid-single digits year-over-year in the fourth quarter of fiscal 2022.

In A Nutshell: “While our third quarter results underscore the initial progress we are making toward rebalancing our assortments and reducing inventories, we continue to take a prudent approach in light of the uncertain consumer and increasingly promotional environment as we look to the remainder of fiscal 2022,” Katrina O’Connell, executive vice president and chief financial officer of Gap Inc., said. “In the near-term, we remain focused on the actions necessary to reduce inventory, rebalance our assortments to better meet changing consumer needs, aggressively manage and reevaluate our investments and fortify our balance sheet. While we have work to do, we believe we are taking the right steps in order to position Gap Inc. for sustainable, profitable growth and to deliver value for our shareholders over the long term.”

As part of its 350-store closure plan, Gap Inc. has closed 29 Gap and Banana Republic stores in North America year-to-date and expects to close approximately 30 more in the fourth quarter of fiscal 2022. The company is on track to open about 30 new Athleta stores in the fiscal year 2022. It now expects to open approximately 10 new Old Navy stores in the fiscal year 2022; this excludes the 24 Old Navy Mexico stores which were transferred to a franchisee in the third quarter of this year.

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Gap Inc. will continue to rely heavily on markdowns and discounting to sell-through reliable styles in hopes of entering the fiscal year 2023 with an improved inventory position.

Yeezy Gap Pops Up in Chicago, Miami and LA in All-Black Vans
Yeezy x Gap tried popping up before breaking up. Courtesy

Net Sales: Net sales of $4.04 billion were up 2 percent compared to last year, or 3 percent on a constant currency basis, driven by an improvement in trend relative to the first half of the year and in part due to the timing of franchise sales, O’Connell said. Comparable sales were up 1 percent year-over-year. Online sales increased 5 percent compared to last year, representing 39 percent of total net sales. In-store sales increased by 1 percent year-over-year. The company ended the quarter with 3,380 store locations in over 40 countries, of which 2,743 (81.15 percent) were company operated.

Old Navy delivered net sales growth of 2 percent over last year, showing early signs of improvement as the brand continues its efforts to right-size inventory, balance assortment, relevance and sizing across its channels. Gap’s net sales of $1.04 billion were flat to last year, with global comparable sales up 4 percent. North American comparable sales were flat as well. Banana Republic’s net sales of $517 million were up 8 percent compared to last year, with comparable sales up 10 percent. Athleta’s net sales of $340 million were up 6 percent, an increase of 57 percent compared to 2019 pre-pandemic levels.

Net Earnings: Gap Inc. reported a net income of $282 million, including an income tax benefit of $114 million related to the cumulative impact of a change in estimated annual tax rate because of quarterly earnings visible. The adjusted net income of $260 million excluded the gain on sale and impairment charges, with adjusted net income including an adjusted income tax benefit of $122 million.

The reported gross margin was 37.4 percent; the adjusted gross margin, excluding $53 million in impairment charges related to Yeezy Gap, was 38.7 percent, deleveraging 320 basis points versus last year. Merchandise margin declined 480 basis points versus last year; adjusted for the impairment charge, merchandise margin declined 370 basis points. Merchandise margins were negatively impacted by higher discounting and inflationary commodity price increases and partially offset by lapping last year’s higher air freight expense. Rent, occupancy, and depreciation (ROD) leveraged 10 basis points versus last year primarily due to higher sales volume during the quarter; excluding a Yeezy Gap impairment charge, ROD leveraged 50 basis points versus last year.

CEO’S Take: “I have deep conviction that we have a portfolio of iconic brands that our customers love, increased confidence in our platform to drive leverage and economies of scale, and belief in the team’s ability to deliver,” Bob Martin, executive chairman and interim CEO of Gap Inc., said. “We have sharpened our focus on execution to optimize profitability and cash flow, are bringing more rigor to our operations, and balancing our assortments in response to what our customers are telling us. While our efforts show early signs of improvement, we are clear that there is work to be done to deliver what our customers, employees and shareholders expect from Gap Inc.”

Martin has served as interim president and CEO for four months after Sonia Syngal stepped down in July. The board remains active in its search for a permanent CEO.

Since taking on the role, Gap Inc. has taken actions resulting in roughly $250 million in estimated annualized savings. These actions include eliminating 500 existing and open roles in its corporate offices and a pause on hiring and contractor spending for the remainder of the year, totaling $125 in estimated annualized savings. The apparel giant also launched a storefront on Amazon Fashion earlier this month.

“I have no doubt, we have world-class brands that our customers love, and we drive value and scale through the synergy of our platform,” Martin said. “But I’m also very clear that there is work to be done to right-size our cost structure, streamline inventory, and capitalize on our creative strengths to deliver the products and experience our customers deserve and employees and shareholders expect.”