Specialty clothing retailer Gap Inc expects to take a first-quarter sales hit of about US$100m due to the coronavirus (Covid-19) outbreak – and says it is working on contingency plans to tackle falling demand and supply chain disruption.
The comments came as the retailer released its fourth-quarter and full-year earnings and said it has appointed Old Navy finance boss, Katrina O’Connell, as its new CFO.
Speaking to analysts on the group’s earnings call yesterday (12 March), outgoing CFO Teri List-Stoll said the company has made “meaningful progress” over the last year in its migration away from China and currently sources about 16% of its goods from the country – down from 21% last year.
“However, we should note that a significant portion of fabric production occurs in mills operated in China supplying vendors outside of China. While early days, it appears that much of the mill production will remain largely on schedule. Additionally, we did not experience any meaningful disruption from factory closures in China at the start of this year.”
With regards to its broader global supply chain network of vendors outside China, List-Stoll said Gap’s global sourcing organisation “is working closely in coordination with its logistics and transportation teams to minimise any potential delays or disruption, particularly as it relates to fall and holiday flow.
“Our sophisticated supply chain operations, along with our strategic partnerships throughout our sourcing and logistics network, give us confidence in our ability to navigate through the very dynamic and fluid situation we’re facing today,” she said.
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By GlobalDataGap Inc said it was unable to provide a reasonable estimate of further impact from the evolving outbreak, but said it had lost about $100m in sales in the first quarter in Asia and Europe.
“China, which represents approximately 3% of global net sales, has been our most impacted region quarter-to-date as a result of store closures and reduced traffic trends. Our businesses in Japan and Europe have also been impacted by store closures and reduced traffic trends, but they’re earlier in the cycle. And with the US, cases are just emerging.
While “we’re starting to see some impact on traffic here [in the US]…we have not yet quantified an impact for North America.”
Q4 and fiscal 2019 results
The forecasts came as the retailer reported a net loss of US$184m in the fourth quarter ended 1 February, compared to net income of $276m in the prior-year period.
This year’s key holiday quarter included an impairment charge of $296m related to the store assets and operating lease assets of the company’s flagship stores. Gap is looking at options to exit or sub-lease certain flagship locations, including the Gap and Old Navy Times Square locations.
There were also significant costs incurred in the quarter related to the recently cancelled spin-off of its Old Navy business, with fourth-quarter separation-related charges of $189m.
Net sales in the quarter edged up 1% year-on-year to $4.7bn. Total comparable sales were down 1% compared with negative 1% last year. At Old Navy Global, comps were flat versus flat last year, while at Gap Global, comp sales were down 5% versus negative 5% last year. Banana Republic Global comp sales were flat versus negative 1% last year, while at Athleta, comp sales were up 2% versus a 7% rise a year ago.
Fourth-quarter gross margin increases 20 basis points to 35.8% compared with last year.
For the full year, net income tumbled to $351m, compared to $1bn a year earlier, while net sales declined 1% to $16.4bn. The translation of foreign currencies into US dollars hit net sales by about $61m.
Comparable sales for the year were down 3% compared with flat last year. At Old Navy Global, comps were down 2% versus positive 3% last year, while at Gap Global, comp sales fell 7%, compared to a 5% drop a year ago. Banana Republic Global comp sales were negative 2% versus positive 1% last year, and at Athleta, comps rose 5% versus a 9% rise last year.
Fiscal year 2019 gross margin was 37.4%, a decrease of 70 basis points compared with last year.
Despite what he called a “challenging year,” interim CEO Bob Fisher said Gap began to see stabilisation in its business in the fourth quarter, driven primarily by improvement in Old Navy’s performance.
Fisher will step aside later this month when Old Navy boss, Sonia Syngal, will take the reins of Gap Inc as the company’s next CEO.
“The current environment presents new challenges, but I am confident in Sonia’s leadership and her ability to deliver the transformational change required,” he added.
Outlook
In its earnings release, Gap said its fiscal 2020 guidance largely does not incorporate any estimated impact from the coronavirus outbreak, with the exception of the $100m sales hit or $0.10 in diluted earnings per share.
The company expects both comparable sales and net sales for fiscal year 2020 to be down low-single digits. Reported diluted earnings per share are forecast in the range of $1.23 to $1.35.
Leadership updates
Following Syngal’s appointment last week, Gap has also outlined several additional leadership changes, including the promotion of Old Navy finance boss, Katrina O’Connell, as the company’s new CFO. List-Stoll, who has served in the role since January 2017, will remain with Gap for several months to ensure a smooth transition.
Meanwhile, Mark Breitbard is set to lead the company’s specialty brands, as well as its Asia business and franchise; and Nancy Green will step up to lead the Old Navy brand while the board and management undergo an internal and external search for the next president and CEO.
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