Athleta’s sales grew 35 percent in the third quarter, according to its parent, Gap Inc. Comparable sales were the highest in the brand’s history – up 37 percent – and online contribution remained above 50 percent in the quarter.
Gap said in a statement, “Athleta continues to benefit from its participation in the highly relevant values-driven active and lifestyle space, strong returns from increased digital marketing investments, and a focused product strategy, which is driving a healthy regular price business. While performance was strong across the brand, masks continued to attract new customers, providing the opportunity to build a relationship across other product offerings.”
Athleta operated 198 stores at the quarter’s close, opening 10 and closing two during the year.
Companywide, net sales were flat year-over-year at $4.0 billion, above Wall Street’s consensus estimate of $3.80 billion. The performance reflected a 61 percent increase in online sales, offset by a 20 percent decline in store sales. Notably, 40 percent of the company’s sales were online in the third quarter. As noted during the company’s Investor Meeting, held in October 2020, the company aspires to achieve 50 percent of its sales from online by the end of 2023.
Third-quarter fiscal year 2020 comparable sales were up 5 percent, driven by the strength of Gap Inc.’s scaled e-commerce business, which added over 3.4 million new customers during the quarter. The comparable sales calculation reflects online sales and comparable sales days in stores that were open.
Among its other banners:
- Old Navy Global: Net sales increased 15 percent, with comparable sales up 17 percent. Gap Global net sales were down 14 percent and comparable sales were down 5 percent.
- Banana Republic Global: Net sales were down 34 percent, a slight improvement versus the second quarter. Comparable sales were down 30 percent.
Gross margin was 40.6 percent, a 160 basis point improvement versus last year. This improvement is consistent with the strategic focus outlined in last month’s Power Plan 2023 discussion of opening highly-profitable Old Navy and Athleta stores, while also closing select unprofitable Gap and Banana Republic stores, yielding significant rent and occupancy savings. In addition, a lower level of promotions contributed to higher product margins in the quarter. The benefits of lower rent and occupancy and higher product margin were partially offset by higher shipping expenses associated with the company’s growth in online sales.
Operating expenses were 36.2 percent of sales, an increase of 270 basis points versus last year, reflecting over 175 basis points in higher marketing investment across all brands and approximately 140 basis points in spending to support health and safety measures in stores. Operating expenses were also impacted by approximately 120 basis points in costs associated with store closures that were mostly offset by rent and occupancy benefits reflected in gross margin. These increases were partially offset by approximately 200 basis points in one-time costs in the year-ago quarter primarily related to the company’s previously planned separation of Old Navy.
Operating income was $175 million or 4.4 percent of net sales, down 20.8 percent from $221 million a year ago.
The effective tax rate was 21.5 percent, primarily reflecting changes in the estimated benefit associated with the enactment of the Coronavirus Aid, Relief and Economic Security (CARES) Act and the impact of the company’s geographical mix of pre-tax earnings. The year-to-date effective tax rate was 23.7 percent.
Net income declined 32.1 percent to $95 million, or 25 cents a share, from $140 million, or 37 cents, a year ago. Results were slightly below Wall Street’s consensus estimate of 29 cents.
The profit decline reflects gross margin improvement versus the prior year, partially offset by higher operating expenses, including a significant increase in marketing support across all brands.
“Our third-quarter results reflect our Power Plan 2023 in action — specifically the strength of our online business, which comprised 40 percent of sales, and our commitment to meeting the shopping preferences of our customers through our leading Omni platform,” said Sonia Syngal, CEO, Gap Inc. “With our teams focused on sales growth and returning to profitability, we’ve made investments in demand generation that are driving engagement, particularly in this dislocated market as customers are looking to trusted brands to provide easy and safe shopping options.”
2020 Financial Outlook
Recognizing the continued high level of uncertainty in the marketplace, the company is not providing a fiscal year earnings outlook. The widely-noted recent rise in COVID-19 cases remains a concern, which may impact store traffic. However, with rapidly growing online sales contribution, at over 40 percent of company sales in the quarter, and the opportunity for market share gains, supported by the significant investment in marketing, the company remains optimistic for the fourth quarter.
Behind the continued investment in digital capabilities, including the third-quarter launch of its loyalty program, the company believes it is well-positioned heading into the holiday shopping season.
General assumptions for the fourth quarter include:
- Net sales being equal to, or slightly higher than, last year;
- Gross margin rate being equal to last year, reflecting continued benefits of store closures largely offset by higher shipping expenses; and
- Operating expenses being between 33 percent to 34 percent of company sales, reflecting the company’s continued investment in brand marketing, behind the opportunity to capture market share, as well as the continued cost of in-store health & safety measures on behalf of our customers and employees.
“We’re really pleased to see key elements of our Power Plan 2023 strategy driving results in the third quarter, reflected in improving sales and gross margin trends, following the COVID-19-related store closures earlier in the year,” said Katrina O’Connell, CFO, Gap Inc. “Importantly, our strong cash flow continues to provide us ample liquidity to invest in marketing support behind our brands, as well as digital capabilities to drive our rapidly growing online business.”
Photo courtesy Athleta