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August 26, 2022

Gap Inc withdraws FY guidance as it swings to Q2 loss

US specialty clothing retailer Gap Inc has withdrawn its prior fiscal 2022 outlook on the back of what CFO Katrina O’Connell calls recent execution challenges combined with uncertain macro trends.

By Beth Wright

Reporting its second-quarter results, Gap Inc says it is withdrawing its prior fiscal 2022 outlook given the actions it has underway and in midst of a CEO transition, combined with the uncertain macro-environment.

The news comes as the Old Navy and Banana Republic owner reported net sales of US$3.86bn for the three months ended 30 July, down 8% compared to last year. Comparable sales were down 10% year-over-year.

Online sales declined 6% on the prior year period and represented 34% of total net sales, while store sales were down 10% compared to last year.

At brand level, during the second quarter, net sales at Old Navy amounted to $2.1bn, down 13% compared to last year, while those at Gap fell 10% on last year to $881m.

Net sales at Banana Republic, meanwhile, totalled $539m, up 9% compared to last year, while those at Athleta edged up 1% to $344m.

Reported gross margin was 34.5%, while adjusted gross margin, excluding a $58m charge related to the impairment of unproductive inventory, was 36%, deleveraging 730 basis points versus last year.

Meanwhile, Gap Inc swung to a net loss of $49m for the quarter from net earnings of $258m in the same period a year earlier. Adjusted net income was $30m, which excludes inventory impairment and a $35m charge related to the transition of Old Navy’s Mexico business.

“This is a pivotal moment in time. While we search for a new leader, I am taking on the role as interim president and CEO of Gap Inc with a deep commitment to the company’s success and impatience for change. Having navigated the global retail industry across brands and markets, I am not approaching this work from the sidelines,” says Bob Martin, executive chairman.

“We are taking actions to better optimise profitability and cash flow in the near term, reducing operating costs as well as impairing unproductive inventory. While our elevated inventory and pressured margins are current realities against unsettled market conditions, they do not define our ability to capitalise on Gap Inc’s strengths to win.”

Martin’s role as interim president and CEO comes after the news Sonia Syngal had stepped down in July.

Fiscal Year 2022

Given what it called the actions it has underway and in the midst of a CEO transition, combined with the uncertain macro-environment, Gap Inc says is withdrawing its prior fiscal 2022 outlook.

It had previously revised its full-year guidance in May as it swung to a loss in the first quarter as sales fell by 13% on the prior year.

“We have four strong brands and leverage in the portfolio to deliver over the long-term, however, our recent execution challenges combined with the uncertain macro trends requires us to manage the levers in our control and take the actions necessary to drive improvement across our entire business,” says CFO Katrina O’Connell.

“In the near-term, we are taking actions to sequentially reduce inventory, rebalance our assortments to better meet changing consumer needs, aggressively manage and reevaluate investments, and fortifying our balance sheet. While we have work to do, we believe these are the right initial steps to position Gap Inc back on its path toward growth, margin expansion, and delivering value for our shareholders over the long term.”

Gap Inc notes coming off of peak inflation and the higher gas prices particularly impacting the lower-income consumer in June, the company has seen an improvement in sales trends in July and into August consistent with many other retailers. While it points to progress balancing its assortments, the company says it is remains cautiously optimistic in light of the consumer environment as it relates to its revenue in the second half of fiscal 2022.

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