Comparable sales were down 19% for the Gap brand during the fourth quarter

Comparable sales were down 19% for the Gap brand during the fourth quarter

US specialty clothing retailer Gap Inc has reported mixed results over the key holiday quarter, swinging to a profit despite falling sales, and forecasting a return to growth in the year ahead.

The San Francisco based retailer said fourth quarter net sales fell 5% to US$4.4bn in the 13 weeks to 30 January, with Covid-mandated store closures in international markets, softer store traffic in the US, and store closures all having an impact. 

Store sales tumbled 28% in the three-month period, but online sales grew 49% compared with last year, reaching 46% of net sales in the quarter. 

Comparable sales were up 5% at Old Navy and rose 29% for Athleta, but were down 19% for the Gap brand and slumped 27% at Banana Republic.

Gross margin climbed 190 basis points from the prior year to 37.7%, helped by higher online sales, the closures of unprofitable stores, favourably settled lease liabilities, and successful rent negotiations.

Product margin also expanded, with lower promotional activities offsetting the higher shipping costs associated with the rise in online sales and carrier surcharges, as well as increased freight costs.

Net income for the quarter was US$234m, compared with a loss of US$184m a year earlier. Earnings included a tax gain and an impairment charge related to Gap's Intermix business. 

For the full year, net sales fell 18.7% to US$13.8bn from US$16.4bn a year earlier, and the business plunged to a loss of US$665m from a profit of US$351m last time.

The retailer, which has 3,715 store locations in 45 countries – of which 3,100 are company operated – continues to see Covid impacts persisting in the first half of 2021 but expects a "return to a more normalised, pre-pandemic level of net sales in the second half of 2021."

It also warned that longer in-transit times, due to port congestion, are expected to continue in the first half of 2021. As a result, end of second quarter 2021 inventory is anticipated to be up high-single digits versus last year.

For fiscal year 2021, the company expects diluted earnings per share to be in the range of $1.20 to $1.35. Net sales are seen in the mid- to high-teens growth versus fiscal year 2020.

Still not firing on all cylinders

Although Gap's sales have worsened since last quarter, most of this is down to significant deterioration in Europe where, due to lockdowns, sales slumped by 45% over the prior period, says Neil Saunders, managing director of GlobalData.

"Within the US, sales numbers have weakened a little since last quarter, reflecting more muted demand for apparel over the period, but a 0.6% decline is a remarkably robust outcome given the ongoing disruption to the clothing category. Thanks to the recovery the bottom line looks healthy with a net income of $234m over the period. 

"Despite the good headline numbers, Gap is still not firing on all cylinders. The better figures are being propped up mostly by Old Navy with assistance from the much smaller Athleta business. Global sales at the former grew by 5% while the latter surged by 29%. The other two main brands remain in the doldrums. Gap's global sales fell by 19% – not helped by the exposure to foreign markets. And Banana Republic's worldwide revenue declined by 27%.

"Despite both being in decline, there is a difference between Banana Republic and the Gap brand's performance in that the former is mostly related to the shifts from the pandemic, and the latter is a consequence of underlying issues which have been exacerbated by the pandemic. 

"Once the virus abates, Banana Republic should see customers return. Quite how many return and how fast they come back remains to be seen, but we are confident that there will be something of a recovery which can be used as a springboard to rebuild the brand.

"The Gap brand will also see a return of customers, but without some form of reinvention it will revert to previous struggles which saw it lose shoppers, market share, and sales. Gap is a brand that has lost relevance and the company has not set out a very convincing strategy to reimagine it. 

"Defining its style credentials as "Modern American Optimism" is meaningless jargon that does not drive distinctiveness or difference. Meanwhile, shutting physical stores may well be helpful for the bottom line in the short term, but the fact they need to close is a consequence of failure, not a solution to it. 

"Indeed, we are concerned that Gap's attempts to become a digital first business will simply push the brand off the radars of more and more consumers. There are some interesting things in the pipeline, such as the YZY GAP partnership and licensing agreements, but these are fringe projects which do not address the central problems with the business.

"In contrast to its older sibling, the Old Navy brand is both successful and relevant. It delivers a dose of fashion at reasonable price points which are attractive to family shoppers. Admittedly its more casual aesthetic has been attuned to customer demand during the pandemic, but even in more stable times it resonates with consumer lifestyles. 

"Growth slipped a bit in the final quarter; however, we attribute this to lower demand in overall apparel as people socialised less over the holiday period. We do not see the slowdown as an inherent issue for Old Navy and remain confident that it can hit its $10 billion sales target by around 2023.

"Athleta is relatively small in comparison to other divisions, however, it is a brand that is fully aligned with both the moment and longer-term market shifts. It has loyal customers and is optimal for expansion. We believe Gap should double down on growth and investment in the business. 

"Overall, Gap is a very mixed company. It has some brand assets, and some problem divisions. It needs to work on both in order to create a successful and sustainable future."