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Gap Inc. Turns Back to Black in Q4 Even as Sales Dip

Gap Inc. expects 2021 net sales to grow in the mid- to high-teens percentages, assuming a return to a more normalized level in the second half.

In a Nutshell: In reporting financial results for the fourth quarter and fiscal year, Gap Inc. said Thursday that it saw more than $6 billion in sales online, reflecting 54 percent annual sales growth, in the three months through Jan. 30.

Online sales represented 45 percent of total sales versus 25 percent in 2019, leveraging the company’s competitive digital platform and omnichannel capabilities. The active and fleece business was strong across its chains, and the company’s global known customer file expanded by 14 percent in the fourth quarter, ending the year at over 183 million.

Athleta surpassed $1 billion in sales, with 16 percent annual sales growth in fiscal 2020. The company improved store fleet economics by closing a net of 228 Gap and Banana Republic stores globally, ahead of its 225 target, while it refreshed the in-store environment in 71 Gap stores.

Gap Inc. ended fiscal year 2020 with $2.4 billion in cash, cash equivalents, and short-term investments, compared to $1.7 billion at the end of fiscal year 2019, providing sufficient liquidity to address remaining challenges from the coronavirus pandemic, support the company’s long-term growth strategy, and return cash to shareholders.

As of the end of fiscal year 2020, while Gap Inc. inventory was up 14 percent versus the year-ago quarter, markdown inventory ownership was below last year. The company said it was “pleased with its current inventory composition and is confident that first half assortments and the quality of the inventory composition will enable product margins in the first half of 2021 to be above last year’s levels.”

Full year free cash flow–net cash from operating activities less purchases of property and equipment–was negative $155 million compared with positive $709 million last year. Following the pinnacle of the coronavirus impact during the first quarter of fiscal year 2020, free cash flow during the last three quarters of the year was approximately $900 million.

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For fiscal year 2021, the company expects diluted earnings per share to be in the range of $1.20 to $1.35.

The company expects fiscal year 2021 net sales to reflect mid- to high-teens growth versus fiscal year 2020, which assumes Covid-19 impacts persisting in the first half of 2021 and a return to a more normalized, pre-pandemic level of net sales in the second half of 2021. Gap Inc. expects to deliver operating margin of approximately 5 percent in 2021, which it said was consistent with its Power Plan 2023 objective of achieving at least a 10 percent operating margin by the end of 2023.

Longer in-transit times, due to port congestion, are expected to continue in the first half of 2021. As a result, end of second quarter 2021 inventory is anticipated to be up high-single digits versus last year.

Capital spending is expected to be approximately $800 million in fiscal year 2021. The 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.

In fiscal year 2021, the company plans to open 30 to 40 Old Navy stores and 20 to 30 Athleta stores, as well as close approximately 100 Gap and Banana Republic stores globally.

Sales: Net sales in the fourth quarter declined 5 percent compared to last the previous year to $4.4 billion. COVID-mandated store closures in international markets and softer store traffic in select U.S. regions with stay-at-home restrictions impacted sales by an estimated 4 percent. In addition, strategically planned permanent store closures had an estimated sales impact of about 5 percent.

Online sales grew 49 percent compared with the year-ago period. Online represented 46 percent of net sales in the quarter, an increase of over 17 percent year over year. Store sales declined 28 percent. Comparable sales for the quarter were flat.

Old Navy global net sales increased 5 percent, with comparable sales up 7 percent. Online growth and significant improvements in markdown rate and units per transaction offset store traffic challenges. Momentum continued in casual and cozy categories, with strong performance in active, fleece and sleep.

Gap global net sales were down 19 percent and comparable sales were down 6 percent, as Gap Brand’s global footprint was meaningfully impacted by government-mandated store closures and restrictions in Canada, China, Europe and Japan. North America comparable sales were positive.

Banana Republic global net sales fell 27 percent and comparable sales were off 22 percent. The company said its new brand leadership team is moving quickly to ensure the assortment addresses consumer needs in the current, casual environment, as well as closely aligning inventory with demand.

Athleta net sales increased 29 percent, with comparable sales up 26 percent, reflecting strong demand for active apparel products. Promotional activity was well below a year earlier, driving margin expansion in the quarter. As part of Athleta’s long-term growth strategy, new product launches in the quarter, specifically inclusive sizing and sleep, continued to drive brand awareness and customer engagement.

For the year, Gap Inc. net sales declined 15.8 percent to $13.8 billion from $16.38 billion in fiscal 2019.

Earnings: Net income in the quarter improved to $234 million from a net loss of $184 million in the year-ago period.

Operating income was $134 million, or 3 percent of sales, leveraging 820 basis points versus last year’s operating margin, due to prior-year flagship store impairments and separation-related costs.

The company’s diluted earnings per share were 61 cents for the fourth quarter, including approximately 45 cents for non-recurring tax benefits and approximately 12 cents in impairment charges related to the Intermix business resulting from a strategic review.

Gross margin was 37.7 percent, an increase of 190 basis points versus last year, well ahead of the company’s prior outlook of being flat versus the year-ago quarter. Rent, occupancy and depreciation savings leveraged 400 basis points, as online sales increased and as the company continued to close unprofitable stores, favorably settle lease liabilities and derive benefit from rent negotiations.

Merchandise margins deleveraged 210 basis points, driven by 300 basis points of higher shipping costs associated with increased online sales and carrier surcharges. There were also increases in freight costs that put pressure on the product margin, but despite these increases, product margin expanded due to lower promotional activities.

For the year, Gap Inc. posted a net loss of $665 million versus net income of $351 million in fiscal 2019.

CEO’s Take: Sonia Syngal, CEO, said: “We faced one of the most difficult years in our company’s history and, throughout, our teams showed resilience and determination as we navigated unprecedented disruption in our industry to set a course for long-term growth. Our powerful brands moved to offense with purpose-led marketing and strength in relevant categories, like active and fleece, allowing us to gain meaningful market share quarter-over-quarter in a fragmented environment. This was enabled by our $6 billion online business and advantaged digital capabilities allowing us to expand our reach to more than 183 million customers this year. We are focused on executing against our Power Plan 2023 and delivering profitable growth in 2021.”