Gap Inc. reported net sales at its Athleta women’s activewear chain fell 11 percent in the first quarter to $321 million. Gap said Athleta’s sales “were impacted by continued product acceptance challenges.”
Comparable sales at Athleta were down 13 percent in the quarter.
Conpanywide, Gap’s net losses narrowed and sales were largely in line with expectations. However, four of its brands, also including Old Navy, Gap and Banana Republic, reported declining sales again.
First Quarter Fiscal 2023 – Financial Results
- Net sales of $3.28 billion, down 6 percent compared to last year, inclusive of an estimated 1-point foreign exchange headwind and 2 percentage points of negative impact from the sale of Gap China. Net sales were in line with the company’s expectations for a mid-single digit decline in the quarter.
- Comparable sales were down 3 percent.
- Store sales decreased 4 percent compared to last year. The company ended the quarter with 3,453 store locations in over 40 countries, of which 2,601 were company operated.
- Online sales decreased 9 percent compared to last year and represented 37 percent of total net sales.
- Reported gross margin was 37.1 percent. Excluding $4 million in restructuring costs, adjusted gross margin of 37.2 percent increased 570 basis points versus last year.
- Merchandise margin increased 600 basis points versus last year, or 610 basis points on an adjusted basis, 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 40 basis points versus last year primarily due to lower online sales in the quarter.
- Reported operating loss was $10 million; reported operating margin of negative 0.3 percent.
- Adjusted operating income was $18 million, excluding a $47 million gain related to the sale of an office building and $75 million of restructuring costs; adjusted operating margin of 0.5 percent.
- The effective tax rate was 10 percent.
- Reported net loss of $18 million; reported diluted loss per share of $0.05.
- Adjusted net income of $3 million, excluding the gain on sale and restructuring costs; adjusted diluted earnings per share of $0.01.
First Quarter Fiscal 2023 – Balance Sheet and Cash Flow Highlights
- Ended the quarter with cash and cash equivalents of $1.2 billion, an increase of 38 percent from the prior year.
- Net cash from operating activities was $15 million. Free cash flow, defined as net cash from operating activities less purchases of property and equipment, was negative $102 million.
- Ending inventory of $2.3 billion was down 27 percent compared to last year.
- Capital expenditures were $117 million.
- Paid first quarter dividend of $0.15 per share, totaling $55 million. Board of Directors approved second quarter fiscal 2023 dividend of $0.15 per share.
First Quarter Fiscal 2023 – Global Brand Results
- Net sales of $1.8 billion, down 1 percent compared to last year. Sales in the quarter were driven by continued strength in the women’s category offset by continued softness in the active and kid’s categories as well as continued slower demand from the lower-income consumer.
- Comparable sales were down 1 percent.
- Net sales of $692 million, down 13 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 1 percent versus last year driven by continued strength in the women’s category offset by continued softness in the active and kid’s categories as well as strategic store closures in North America.
- Comparable sales were up 1 percent.
- Net sales of $432 million, down 10 percent on top of 24 percent growth last year. Sales in the quarter were impacted as the brand lapped outsized growth last year driven by the shift in consumer preferences.
- Comparable sales were down 8 percent.
- Net sales of $321 million, down 11 percent compared to last year. Sales in the quarter were impacted by continued product acceptance challenges.
- Comparable sales were down 13 percent.
Fiscal 2023 Outlook
“As we look to the remainder of fiscal 2023, we believe we remain well positioned to drive continued margin expansion and improved cash flow relative to last year despite what we know continues to be an uncertain macro and consumer environment,” said Katrina O’Connell, Executive Vice President and Chief Financial Officer, Gap Inc. “We continue to believe we are taking the right steps toward positioning Gap Inc. back on its path towards sustainable, profitable growth and delivering value for our shareholders over the long term.”
The company’s outlook takes into consideration the continued uncertain consumer and macro environment.
The company is estimating second quarter net sales could decrease in the mid to high-single-digit range compared to last year’s net sales of $3.86 billion. As a reminder, the sale of Gap China to Baozun Inc. closed on January 31, 2023. Second quarter 2022 net sales included approximately $60 million in sales for Gap China.
The company continues to anticipate that fiscal 2023 net sales could decrease in the low to 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 expects second quarter and fiscal 2023 gross margin expansion compared to the prior year. At the estimated level of sales described above, the company is planning adjusted SG&A of approximately $1.3 billion in the second quarter and continues to anticipate approximately $5.2 billion for fiscal 2023.
The company now expects fiscal 2023 capital expenditures in the range of $500 million to $525 million, compared to its prior range of $500 million to $550 million, reflecting lower capital project investments and fewer Old Navy and Athleta store openings than previously contemplated.
Photo courtesy Athleta