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May 27, 2022updated 06 Jun 2022 4:23pm

Gap Inc revises FY outlook as it moves to Q1 loss

US specialty clothing retailer Gap Inc has revised its full-year guidance as it swung to a loss in the first quarter as sales fell by 13% on the prior year.

By Beth Wright

San Francisco-based Gap Inc posted a net loss of US$162m for the 13 weeks ended 30 April, compared to net income of $166m a year prior.

Net sales of $3.5bn were down 13% compared to last year, with growth negatively impacted by an estimated five percentage points related to lapping the benefit of stimulus last year and about three percentage points from divestitures, store closures, and the transition of the company’s European business to a partnership model.

Comparable sales were down 14% year-over-year, while online sales declined 17% and represented 39% of total net sales. Store sales fell 10% year on year compared to last year.

By brand, net sales of $1.8bn at Old Navy were down 19% compared to last year, with Gap Inc noting growth was impacted by size and assortment imbalances, ongoing inventory delays, and product acceptance issues in some key categories.

At the group’s namesake brand, net sales of $791m fell 11% as 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 Gap was also hit by the Covid-related forced lockdowns and slowed overall demand in China.

Sales at Banana Republic, meanwhile, increased by 24% to $482m, while those at Athleta grew 4% to $360m.

Gross margin was 31.5%, 930 basis points lower than last year.

“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-stabilise the Old Navy business in order to deliver continued progress on our long-term strategy,” says 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.”

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% to 37.5%, while adjusted diluted earnings per share, excluding a net benefit expected from international initiatives, is now expected to be in the range of $0.30 to $0.60. This compares to guidance of $1.85 to $2.05 provided in March.

CFO Katrina O’Connell adds: “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.

“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 capitalise on the significant opportunities ahead.”

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