Gap, Inc. reported that same-store sales at Athleta slumped 8 percent in the second quarter. Gap withdrew its overall guidance for the year.

Net sales at Athleta reached $344 million, up 1 percent compared to last year. Gap said its statement, “While the brand continues to make progress in driving awareness and establishing authority in the women’s active and wellness category, it is experiencing softness related to the shift in consumer preference from athleisure to occasion and work-based categories as well as modest spring/summer product acceptance challenges.”

Companywide, Gap Inc.’s sales reached $3.86 billion, down 8 percent compared to last year. Wall Street’s consensus estimate had been $3.82 billion. Comparable sales were down 10 percent year-over-year.

Among its other banners:

  • Old Navy: Net sales of $2.1 billion, down 13 percent compared to last year. Sales in the quarter were negatively impacted by size and assortment imbalances, ongoing inventory delays, product acceptance issues in some key categories as well as slowing demand stemming from the lower-income consumer. Comparable sales were down 15 percent.
  • Gap: Net sales of $881 million, down 10 percent compared to last year. The brand was impacted by category mix imbalances during the quarter. The decrease in net sales was also driven by strategic store closures. In addition, the Gap outlet business is experiencing near-term softness stemming from inflationary pressures impacting the lower-income consumer. Global comparable sales were down 7 percent. North America comparable sales were down 10 percent.
  • Banana Republic: Net sales of $539 million, up 9 percent compared to last year. The brand maintains its focus on delivering quality product through a differentiated experience. It continues to capitalize on the current shift in consumer trends while realizing ongoing benefits since last year’s brand relaunch. Comparable sales were up 8 percent.

Reported gross margin was 34.5 percent. Adjusted gross margin, excluding a $58 million charge related to the impairment of unproductive inventory, was 36.0 percent, deleveraging 730 basis points versus last year.

On a reported basis, merchandise margins were down 850 basis points versus last year; adjusted for the inventory impairment, merchandise margins declined 700 basis points. Merchandise margins were negatively impacted by an estimated $50 million, or 130 basis points, of incremental transitory air freight costs, and the remaining decline of approximately 570 basis points was driven by higher discounting, primarily at Old Navy, and inflationary commodity price increases. The declines were partially offset by the benefit of lower discounting at Banana Republic.

Reported operating loss was $28 million in the quarter. Reported operating margin of (0.7 percent). Adjusted operating income was $65 million; adjusted operating margin of 1.7 percent. Adjusted operating income and margin exclude the inventory impairment and a $35 million charge related to the transition of Old Navy’s Mexico business.

Reported net loss of $49 million. Adjusted net income of $30 million, which excludes the inventory impairment and Old Navy Mexico charge.

Reported diluted loss per share was 13 cents. Adjusted diluted earnings per share of 8 cents, which excludes the inventory impairment and Old Navy Mexico charge. Reported and adjusted diluted earnings per share include an estimated 10 cents of impact related to transitory elevated air freight expense during the quarter. Wall Street’s consensus estimate had called for a loss of 5 cents a share.

Ending inventory of $3.1 billion was up 37 percent year-over-year. This includes nearly 10 percentage points of pack and hold inventory and 7 percentage points of in-transit. More than half of the remaining balance of the increase is attributable to basics.

Fiscal Year 2022 Outlook
“We have four strong brands and leverage in the portfolio to deliver over the long-term; however, our recent execution challenges combined with the uncertain macro trends require us to manage the levers in our control and take the actions necessary to drive improvement across our entire business,” said Katrina O’Connell, executive vice president and chief financial officer, Gap Inc. “In the near term, we are taking actions to sequentially reduce inventory, rebalance our assortments to better meet changing consumer needs, aggressively manage and reevaluate investments and fortify our balance sheet. While we have work to do, we believe these are the right initial steps to position Gap Inc. back on its path toward growth, margin expansion, and delivering value for our shareholders over the long term.”

Given the actions the company has underway and in midst of a CEO transition, combined with the uncertain macro-environment, the company is withdrawing its prior fiscal 2022 outlook.

Photo courtesy Athleta