Gap, Inc. significantly reduced its earnings guidance for the year due to ongoing challenges at Old Navy as well as broader macroeconomic pressures. In the first quarter ended April 30, same-store sales tumbled 22 percent at Old Navy while also sliding 11 percent at the Gap chain and 7 percent at Athleta.
“Our Q1 results and updated fiscal 2022 outlook primarily reflect industry-wide headwinds as well as challenges at Old Navy that are impacting our near-term performance. While we are disappointed to deliver results below expectations, we are confident in our ability to navigate the headwinds and re-stabilize the Old Navy business in order to deliver continued progress on our long-term strategy,” said Sonia Syngal, CEO, Gap, Inc. “We believe that we can navigate this period of acute disruption and build an even more resilient and agile company. We remain anchored by our belief in our iconic purpose-led brands—Old Navy, Gap, Banana Republic, and Athleta—and are focused on making continued progress against our Power Plan strategy and getting back on track toward delivering growth, margin expansion, and value for our shareholders over the long term.”
First Quarter Fiscal 2022 Financial Results
- Net sales of $3.5 billion, down 13 percent compared to last year;
- Net sales growth in the first quarter fiscal 2022 was negatively impacted by an estimated 5 percentage points related to lapping the benefit of stimulus last year and approximately 3 percentage points from divestitures, store closures and the transition of the company’s European business to a partnership model;
- Comparable sales were down 14 percent year-over-year;
- Online sales declined 17 percent compared to last year and represented 39 percent of total net sales;
- Store sales declined 10 percent compared to last year. The company ended the quarter with 3,414 stores in over 40 countries, of which 2,825 were company-operated;
- Gross margin was 31.5 percent, 930 basis points lower than last year;
- Merchandise margins were down 760 basis points versus last year and included approximately $170 million, or 480 basis points, of incremental transitory air freight costs. Higher discounting at Old Navy and inflationary commodity price increases partially offset by the benefit of lower discounting at the Banana Republic drove the remaining decline of approximately 280 basis points;
- Rent, Occupancy and Depreciation deleveraged 170 basis points versus last year primarily due to lower sales volume in the quarter;
- Operating loss was $197 million in the quarter with an operating margin of negative 5.7 percent; and
- Net loss of $162 million; diluted loss per share of $0.44.
First Quarter Fiscal 2022 Balance Sheet and Cash Flow Highlights
- Ended the quarter with cash and cash equivalents of $845 million;
- Net cash from operating activities was negative $362 million. Free cash flow, defined as net cash from operating activities less purchases of property and equipment, was negative $590 million;
- Ending inventory was up 34 percent year-over-year to $3.2 billion;
- Capital expenditures were $228 million;
- Share repurchases were $54 million, representing 3.7 million shares;
- Paid first quarter dividend of $0.15 per share, totaling $56 million; and
- The company’s Board of Directors approved a second-quarter fiscal 2022 dividend of $0.15 per share.
First Quarter Fiscal 2022 Brand Results
Net sales of $1.8 billion, down 19 percent compared to last year. Sales in the quarter were negatively impacted by size and assortment imbalances, ongoing inventory delays and product acceptance issues in some key categories. Comparable sales were down 22 percent.
Net sales of $791 million, down 11 percent compared to last year. The brand was slightly impacted by slowed demand stemming from inflationary pressures impacting the lower-income consumer as well as continued inventory lateness to last year. Growth at the Gap Brand was also negatively impacted by pandemic-related forced lockdowns and slowed overall demand in China. Global and North America comparable sales were both down 11 percent.
Net sales of $482 million, up 24 percent compared to last year. The brand is realizing the benefits of last year’s relaunch which is resonating with consumers, particularly in light of the near-term shift into occasion and work-based categories. Comparable sales were up 27 percent.
Net sales of $360 million, up 4 percent compared to last year. The brand continues to make progress in driving awareness and establishing authority in the women’s active and wellness category. Comparable sales were down 7 percent.
Fiscal Year 2022 Outlook
“We are revising our fiscal 2022 outlook to reflect the impact of certain factors impacting our near-term performance, including execution challenges at Old Navy, an uncertain macro consumer environment, inflationary cost headwinds, and a slowdown in China that is impacting Gap Brand,” said Katrina O’Connell, executive vice president and chief financial officer, Gap, Inc. “We expect our performance to improve modestly in the back half of the year and accelerate as we enter fiscal 2023. We believe that our long-term strategy is the right one and we are taking steps to position our brands, platform and people to capitalize on the significant opportunities ahead.”
- The company now expects fiscal 2022 revenue to decline in the low to mid-single-digit range versus last year;
- Gross margin is expected to be in the range of 36.5 percent to 37.5 percent;
- Reported operating margin is expected to be in the range of 1.8 percent to 2.8 percent with an adjusted operating margin in the range of 1.5 percent to 2.5 percent;
- Reported diluted earnings per share are expected to be in the range of $0.40 to $0.70;
- Adjusted diluted earnings per share, excluding a net benefit expected from international initiatives, is expected to be in the range of $0.30 to $0.60;
- Net interest expense of approximately $80 million;
- Effective tax rate of approximately 27 percent;
- Capital expenditures of approximately $700 million; and
- The company continues to expect to open about 30-to-40 stores each for Old Navy and Athleta in the fiscal year 2022. As part of its 350 store closure plan, the company expects to close about 50 Gap and Banana Republic stores in North America during the year.
Previously, the company expected its reported diluted earnings per share to be in the range of $1.95 to $2.15. Excluding a net benefit expected from international initiatives, the company expected its adjusted diluted earnings per share to be in the range of $1.85 to $2.05. The company had expected fiscal year 2022 revenue growth to be in the low single-digit range versus fiscal year 2021.