Gap Inc. ‘Powers’ Through Strong First Quarter

Gap Inc., crediting macro tailwinds and growth strategies taking hold, swung into profitability last quarter amid huge comparable sales gains.

The San Francisco-based operator of Gap, Old Navy, Banana Republic and Athleta reported a net profit of $166 million for the quarter ended May 1, versus a loss of $932 million in the year-ago period. Earnings per share were 44 cents versus a loss of $2.51 in the 2020 quarter.

Operating profits rose to $240 million compared to a loss of $124 billion in the year-ago period.

Net sales rose 89 percent to $3.99 billion last quarter from $2.11 billion a year ago, and were 8 percent above the 2019 quarter. Comparable sales were up 28 percent year-over-year, and up 13 percent from 2019.

Online sales grew 82 percent from the first quarter of 2019 and represented 40 percent of the total business. Store sales declined 16 percent versus the first quarter of 2019, primarily due to strategic closures and COVID-19 closures outside of the U.S.

“Our Power Plan 2023 is taking hold,” said Sonia Syngal, chief executive officer of Gap Inc., on Thursday. “Investments in demand-generation, coupled with macro tailwinds, supercharged our brands. Gap Inc. delivered sales growth of 8 percent over 2019 pre-COVID-19 levels, with particular strength at Old Navy and Athleta, a healthy and growing Gap business in North America, and market share gains that outpaced the industry.”

The company estimated that COVID-19-related closures in markets outside of the U.S. resulted in approximately 2 percent of sales decline versus 2019. Additionally, permanent Gap and Banana Republic store closings, as part of the “Power Plan 2023” strategy, reduced net sales by about 5 percent versus 2019 but were earnings accretive.

Gap Inc.’s Power Plan three-year strategy was introduced last fall. It focuses on growing the Old Navy and Athleta brands while downsizing Gap and Banana Republic and shed small businesses. Recently, Intermix was sold to Altamont Capital Partners and Janie and Jack was sold to Go Global Retail.

“As stores’ traffic came back, we sustained our digital dominance with 82 percent online growth versus 2019,” Syngal said. “And while active and fleece continue to soar, we saw a resurgence in summer fashion with dresses rebounding, showing that customers are emerging from the crisis wanting to express their style without sacrificing the comfort and digital convenience they’ve become accustomed to. Through the power of our brands, platform and portfolio, we deliver it all.”

Katrina O’Connell, executive vice president and chief financial officer, added: “The actions we’ve taken, aligned with our Power Plan 2023 strategy, to reduce discounting, restructure our fleet, and divest our smaller businesses are enabling continued investment in growth and driving us toward our operating margin goal of 10 percent in 2023.”

Several retailers, including Macy’s Inc. and Abercrombie & Fitch Co., also reported strong first-quarter results due to government stimulus, the rollout of vaccinations and decline in COVID-19 cases as well as people starting to go out again.

Gap raised its reported full-year diluted earnings per share guidance to be in the range of $1.55 to $1.70. Excluding charges associated with divestiture activity related to the Janie and Jack and Intermix businesses, full-year EPS on an adjusted basis are expected to be in the range of $1.60 to $1.75.

Gap stated that the outlook “does not include potential impacts of our ongoing strategic review of the European business. In addition, the company continues to closely monitor the impact of COVID-19-related store closures globally, as well as challenges related to the supply chain and port congestion.”

The company now expects net sales growth for fiscal year 2021 to be in the low- to mid-20 percent range versus 2020, an increase versus the previous guidance of mid- to high teens. The outlook reflects lost revenue from divesting Janie and Jack and Intermix, which together represented about 2 percent of annual company sales. This week, the company said the Gap Home collection will be sold exclusively on walmart.com and subsequently also in Walmart stores.

By division, Old Navy Global saw net sales rise 27 percent versus 2019; comparable sales were up 35 percent year-over-year and up 25 percent versus 2019. The gains were attributed to “compelling product storytelling, values-driven messaging, customer acquisition and strong transaction metrics. Growth in key categories like active and fleece remained strong, and seasonal categories are now trending favorably as consumers move into a new phase of pandemic recovery, planning vacations and summer activities,” the company said in its statement Thursday.

At Gap Global, net sales declined 16 percent versus 2019, with permanent store closures resulting in an estimated 11 percent sales decline, and international COVID-19-closures driving an estimated 4 percent decline on a two-year basis. Comparable sales increased 29 percent year-over-year and decreased 1 percent versus 2019.

The Gap North America business “is healthy and growing with first-quarter comparable sales up 9 percent on a two-year basis. “

This week, the company disclosed that the Gap Home collection will be distributed exclusively at walmart.com, and subsequently also at Walmart stores. The arrangement “marks further progress in the company’s objective of creating strategic partnerships to amplify brand reach.”

Banana Republic Global saw net sales decline 29 percent versus 2019. Comparable sales were down 4 percent year-over-year and down 22 percent versus 2019.

“Redefining casual luxury and heightened creativity are top priorities as the team lays the foundation for transformation,” the company said Thursday.

Athleta reported that net sales were up 56 percent versus 2019. Comparable sales grew 27 percent year-over-year and 46 percent versus 2019. Athleta’s digital business was up 113 percent compared to the first quarter of 2019, while achieving “record” regular-priced sales . Product relevance and purpose-led marketing were cited as key factors in the growth. “The team made significant strides driving brand awareness during the quarter through the launch of inclusive sizing and with the announcement of a partnership with Simone Biles, the most decorated gymnast in World Championships history,” the company said.

The company continues to expect to open about 30 to 40 Old Navy and 20 to 30 Athleta stores in 2021, as well as close about 75 Gap and Banana Republic stores in North America.

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