Gap Inc., the parent of the Old Navy, Gap, Banana Republic, and Athleta brands, reported net sales of $3.55 billion in the second quarter, down 8 percent compared to last year’s Q2, inclusive of an estimated 1-point foreign exchange headwind and 2 percentage points of negative impact from the sale of Gap China.

  • Comparable sales were down 6 percent.
  • Store sales decreased 7 percent compared to the prior-year period.
  • Online sales decreased 11 percent compared to last year and represented 33 percent of total net sales.
  • The company ended the quarter with 3,456 store locations in over 40 countries, of which 2,592 were company-operated.

Athleta net sales totaled $341 million for Q2, down 1 percent compared to last year. While sales continue to be impacted by product acceptance challenges, the brand has taken near-term actions to improve product presentation and creative to better align with Athleta’s performance DNA. Comparable sales were down 7 percent.

Old Navy net sales were $1.96 billion in Q2, down 6 percent compared to last year. Strength in women’s tops and woven bottoms and improved trends in men’s and kids were offset by softness in the active category as well as continued slower demand from the lower-income consumer. Comparable sales were down 6 percent.

Gap net sales totaled $755 million in the second quarter, down 14 percent compared to last year. Excluding the negative impact from the sale of Gap China, the shutdown of Yeezy Gap and foreign exchange headwinds, net sales were down 4 percent versus last year. Sales were driven by continued strength in the women’s category offset by strategic store closures in North America. Comparable sales were down 1 percent.

Banana Republic net sales were $480 million in Q2, down 11 percent compared to last year. While Banana Republic maintained market share in the quarter, sales growth remains impacted in the short-term as the brand laps the outsized growth last year driven by the shift in consumer preferences. Comparable sales were down 8 percent.

Consolidated gross margin was 37.6 percent of sales in Q2, increasing 310 basis points versus last year’s Q2 reported gross margin and increased 160 basis points versus last year’s adjusted gross margin which excluded $58 million in inventory impairment charges.

Merchandise margin increased 410 basis points versus last year on a reported basis. Compared to last year’s adjusted rate, merchandise margin increased 260 basis points due to lower air freight expense and improved promotional activity in the quarter, partially offset by inflationary cost headwinds.

Rent, occupancy, and depreciation (ROD) deleveraged 100 basis points versus last year primarily due to lower comparable sales in the quarter.

Reported operating income was $106 million versus an operating loss in the prior-year period. Second quarter operating margin was 3.0 percent of sales.

Adjusted operating income, excluding $13 million in restructuring costs, was $119 million and adjusted operating margin of 3.4 percent the second quarter. Prior-year adjusted operating income was $65 million.

The effective tax rate was negative 8.3 percent. During the quarter, the company recorded a tax benefit as a result of a transfer pricing settlement related to its sourcing activities.

Gap Inc. reported net income of $117 million, or diluted earnings per share of 32 cents a share, for the quarter, compared to a net loss of $49 million, or a loss of 13 cents a share, in the prior year quarter. Adjusted net income was $127 million, excluding restructuring costs, and adjusted diluted earnings per share came in at 34 cents a share. Adjusted net income was $30 million in Q2 2022.

Gap Inc. ended the quarter with cash and cash equivalents of $1.4 billion, an increase of 91 percent from the prior year. Year-to-date net cash from operating activities was $528 million.

Free cash flow, defined as net cash from operating activities less purchases of property and equipment, was $329 million.

Ending inventory of $2.23 billion was down 29 percent compared to last year.

Year-to-date capital expenditures were $199 million.

Paid second quarter dividend of 15 cents per share, totaling $56 million. The company’s Board of Directors approved third quarter fiscal 2023 dividend of $0.15 per share.

Fiscal 2023 Outlook
“As we look toward the long-term, we believe our focus on unlocking the value of our important and iconic brands coupled with the transformative actions we are taking to improve our operating structure will position Gap Inc. back on its path towards delivering sustainable, profitable growth and value for our shareholders,” said Katrina O’Connell, Executive Vice President and Chief Financial Officer, Gap Inc.

The company’s outlook takes into consideration the continued uncertain consumer and macro environment.

The company is estimating that third-quarter net sales could decrease in the low double-digit range compared to last year’s net sales of $4.04 billion. As a reminder, the sale of Gap China to Baozun Inc. closed on January 31, 2023. Third quarter 2022 net sales included approximately $70 million in sales for Gap China.

The company anticipates that fiscal 2023 net sales could decrease in the mid-single digit range compared to last year’s net sales of $15.6 billion. As a reminder, fiscal 2022 net sales included approximately $300 million in sales for Gap China. Fiscal 2023 will include a 53rd week estimated to positively impact net sales by $150 million.

The company continues to expect gross margin expansion for fiscal 2023. At the estimated level of sales described above, the company is planning adjusted operating expenses of approximately $1.3 billion in the third quarter and approximately $5.15 billion for fiscal 2023.

The company continues to expect fiscal 2023 capital expenditures in the range of $500 million to $525 million.

Photo courtesy Athleta