Gap Inc. Reports Second Quarter Results

*Comparable sales rose 13%, led by 95% online net sales increase year-over-year
*18% year-over-year net sales decline driven by COVID-19 related store closures
*Acquired 3.5 million new customers through our online channel, representing over 165% growth in new online customer acquisition year-over-year
*Ended the quarter with $2.2 billion in cash and cash equivalents, an increase of over $1 billion versus prior quarter

Gap Inc. (NYSE: GPS), a collection of purpose-driven lifestyle brands including Old Navy, Gap, Banana Republic and Athleta, reported its financial results for the second quarter of fiscal year 2020, ending August 1. Gap Inc. is the largest specialty apparel company and the second largest apparel e-commerce business in the U.S.

Gap Inc. second quarter results improved meaningfully compared to the first quarter with online sales nearly doubling year-over-year as the company leveraged its omni capabilities through its scaled e-commerce platform. While nearly all stores were temporarily closed due to the COVID-19 pandemic at the start of the second quarter, the company worked to quickly reopen stores where permitted beginning early in the quarter using industry-leading safety measures for customers and employees. The company delivered positive operating income and improved its cash balance by over $1 billion compared to the first quarter, ending the quarter with a cash and cash equivalents balance of $2.2 billion.

“Our strong performance in the second quarter reflects the customer response to our brands, products and experiences, particularly as we’ve rapidly adapted to the changing environment. We nearly doubled our e-commerce business, with approximately 50% online penetration, demonstrating our ability to pivot to a digitally-led culture,” said Sonia Syngal, Chief Executive Officer, Gap Inc. “I’m confident that our purpose-driven lifestyle brands, size and scale, and advantaged digital capabilities are helping us win now and position us for growth in the future.”

Second Quarter Fiscal Year 2020 Results
Net sales were down 18% year-over-year, reflecting a 95% increase in online sales, offset by a 48% decline in store sales, which were impacted by partial closures during the quarter. During May, Gap Inc. began reopening stores previously closed as a result of the COVID-19 pandemic, with approximately 90% of its global fleet open as of August 1.

Second quarter fiscal year 2020 comparable sales were up 13%, driven by the strength of Gap Inc.’s scaled e-commerce business, which added over 3.5 million new customers during the quarter. The comparable sales calculation reflects online sales and comparable sales days in stores that have reopened.

Net sales and comparable sales by brand for the second quarter 2020 compared to the second quarter 2019 were as follows:
*Old Navy Global: Net sales were down 5% reflecting an increase in online sales of 136%, offset by a 36% decline in store sales. Comparable sales were up 24%. Old Navy continued to experience meaningful acceleration in its online business as strong customer response to product was further bolstered by compelling and relevant digital marketing investment. As customers returned to stores, the brand’s off-mall and strip real estate locations, which make up approximately 75% of the brand’s fleet, ramped up more quickly than other formats and continue to be an advantage.
*Gap Global: Net sales were down 28% reflecting an increase in online sales of 75%, offset by a 55% decline in store sales. Comparable sales were up 12%. As the brand’s fleet rationalization efforts continue, the brand remains focused on maximizing online demand through relevant marketing, improved execution and customer engagement.
*Banana Republic Global: Net sales were down 52% reflecting an increase in online sales of 26%, offset by a 71% decline in store sales. Comparable sales were down 27%. Banana Republic continues to focus on taking action to adjust to consumer preferences and improve inventory mix as the shift to casual fashion during the stay-at-home requirements has left the brand’s work wear assortment disadvantaged.
*Athleta: Net sales were up 6% reflecting an increase in online sales of 74%, partially offset by a 45% decline in store sales. Comparable sales were up 19%. The brand continues to benefit from the highly relevant values-driven active and lifestyle space in which it participates, further fueled by the brand’s deep customer engagement through its powerful omni-channel model.

Gross margin was 35.1%, a decline of 3.8 percentage points versus last year, as a result of increased shipping expense as online sales grew and the company leveraged its stores to fulfill strong online demand. Gross margin also reflects rent and occupancy deleverage from the impact of lost sales due to store closures, partially offset by lower promotional activity at Old Navy, Gap and Athleta.

Operating expenses were $1.1 billion, a decrease of $198 million versus last year, primarily due to a decrease in store payroll and benefits and other store expenses resulting from store closures during the quarter. As a percentage of net sales, operating expenses were 32.9%, an increase of 1.1 percentage points driven by lower net sales.

Operating income was $73 million or 2.2% of net sales.
details at: https://www.gapinc.com/en-us/articles/2020/08/gap-inc-reports-second-quarter-results

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Net sales by brand for the first quarter 2020 compared to the first quarter 2019 were as follows: *Old Navy Global: Net sales were down 42%; store sales were down 60% with online sales up 20%. Since the onset of the COVID-19 pandemic, Old Navy has seen a meaningful acceleration in its digital business. The Company noted it expects the off-mall, strip real estate that makes up approximately 75% of the fleet to be an advantage as customers return to stores and expects traffic in these locations to ramp up more quickly than other formats. *Gap Global: Net sales were down 50%; store sales were down 64% with online sales down 5%. Prior to the onset of the pandemic, Gap brand performance continued to be pressured by inconsistent execution of product and marketing messages. However, the Company noted the brand did experience steady improvements in its online performance throughout the quarter, attributable to the Company’s strategy to migrate customers online as the brand’s fleet rationalization efforts continue. *Banana Republic Global: Net sales were down 47%; store sales were down 61% with online sales down 2%. While the move to casual fashion during the stay-at-home requirements has benefited other brands in Gap Inc.’s portfolio, this shift left Banana Republic disadvantaged in its product mix. As a result, Banana Republic is taking aggressive action to adjust to consumer preferences and improve inventory mix. *Athleta: Net sales were down 8%; store sales were down 50% with online sales up 49%. Customer response to Athleta was strong given the values-driven active and lifestyle space the brand participates in as well as the brand’s deep customer engagement through its powerful omni-channel model. Operating loss was $1.2 billion. This reflects the decline in gross margin, as well as a non-cash impairment charge of $484 million related to the Company’s stores to reduce the carrying amount of the store assets and the corresponding operating lease assets to their fair values, which have dramatically declined as a result of the pandemic. The Company noted that as part of its ongoing specialty fleet optimization efforts, the Company has undertaken a strategic review of its real estate portfolio to further advance its long-term strategic priorities that include a smaller, healthier fleet, particularly as it relates to its Gap brand and Banana Republic specialty fleets.
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