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Gap reports huge first-quarter loss

Tom Shearsmith
05 June 2020

Gap Inc, which operates a portfolio of lifestyle brands, including Old Navy, Gap, Athleta and Banana Republic, reported its financial results for the first quarter of fiscal year 2020, ending 2 May 2020 showing an operating loss of $1.2bn.

The Company’s first quarter results were impacted by the temporary closure of approximately 90% of its global store fleet due to the worldwide COVID-19 pandemic.

Gap Inc noted first quarter results reflect the significant impacts of the global pandemic, including lost sales and corresponding merchandise margin from the temporary store closures and operating lease assets, as well as a $235 million non-cash inventory impairment charge.

The first quarter fiscal year 2020 net sales were down 43% 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, which at over $4 billion in net sales in fiscal year 2019, represented about one quarter of the Company’s sales for that fiscal year.

The Company’s first quarter 2020 online sales channel increased 13% compared to the first quarter fiscal year 2019, with the Company noting continued acceleration of online growth following the end of the quarter.

Sonia Syngal, President and CEO of Gap Inc, said: “Our teams' ability to pivot quickly and lean into our strong online business resulted in an encouraging 40% 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% 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. 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.”

The Company’s first quarter 2020 store sales decreased 61% compared to the first quarter fiscal 2019, driven by temporary store closures.

Net sales by brand for the first quarter 2020 compared to the first quarter 2019 were as follows:

  • Old Navy Global: Net sales were down 42%; store sales were down 60% with online sales up 20%
  • Gap Global: Net sales were down 50%; store sales were down 64% with online sales down 5%.
  • Banana Republic Global: Net sales were down 47%; store sales were down 61% with online sales down 2%.
  • Athleta: Net sales were down 8%; store sales were down 50% with online sales up 49%.

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, which are being accrued for accounting purposes.

However, Simon Property Group – the US’s largest shopping centre operator – filed a lawsuit this week over Gap owing three months of rent, totalling $65.9 million (£52 million).

Operating loss was $1.2 billion, which reflects the decline in gross margin.

The Company noted that as part of its ongoing specialty fleet optimisation efforts, the Company has undertaken a strategic review of its real estate portfolio to further advance its long-term strategic priorities that include a smaller, healthier fleet.

Beginning 9 May 2020 the Company started to reopen stores in select countries in accordance with official COVID-19 recommendations provided by the World Health Organisation and local governments.

Katrina O’Connell, EVP and CFO Gap Inc, said: “While we are pleased that store traffic and productivity is exceeding expectations, particularly at Old Navy and Athleta, we continue to plan conservatively as significant uncertainty remains ahead.”

“We intend to lean into our best-in-class supply chain and advantaged omni-channel capabilities to respond as customer demand becomes clearer.”

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