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Gap announces financial results

Gap

Gap Inc., a collection of purpose-led, lifestyle brands including Old Navy, Gap, Banana Republic and Athleta, and the largest specialty apparel company in the U.S., reported its financial results for the fourth quarter and fiscal year 2020, ending 30th January, 2021.

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The company’s diluted earnings per share was $0.61 for the fourth quarter of fiscal year 2020, including approximately $0.45 for non-recurring tax benefits and approximately $0.12 in impairment charges related to the Intermix business resulting from a strategic review.

“We faced one of the most difficult years in our company’s history and, throughout, our teams showed resilience and determination as we navigated unprecedented disruption in our industry to set a course for long-term growth. Our powerful brands moved to offense with purpose-led marketing and strength in relevant categories, like Active and Fleece, allowing us to gain meaningful market share quarter-over-quarter in a fragmented environment. This was enabled by our $6 billion online business and advantaged digital capabilities allowing us to expand our reach to more than 183 million customers this year.” said Sonia Syngal, Chief Executive Officer, Gap Inc.

“We are focused on executing against our Power Plan 2023 and delivering profitable growth in 2021,” added Syngal.

The company unveiled its Power Plan 2023 strategy at its investor event in October 2020. Over $6 billion was delivered in sales online, reflecting 54% annual sales growth. Online sales represented 45% of total sales (versus 25% in 2019), leveraging the company’s competitive digital platform and omnichannel capabilities. Market share grew by 0.2 percentage points, ending the year at 5.5% of total U.S. apparel sales, supported by continued strategic investments in marketing and other demand-driving initiatives.

The company leveraged its sizeable Active and Fleece business to respond to the casualization of style and meet changing customer preferences. The company increased its global known customer file by 14% in the fourth quarter, ending the year at over 183 million. Sales at Athleta surpassed $1 billion with 16% annual sales growth. Store fleet economics improved by closing a net of 228 Gap and Banana Republic stores globally, ahead of its 225 target; refreshed in-store environment in 71 Gap stores.

Gap led the development of safe retailing practices and invested approximately $158 million in health and safety measures to protect employees and customers.
Effectively managed liquidity during the COVID-19 pandemic to emerge with a strong cash position of $2.4 billion at year-end.

Fourth quarter fiscal year 2020 net sales were $4.4 billion, a decrease of 5% compared with last year. COVID-mandated store closures in international markets and softer store traffic in select U.S. regions with stay-at-home restrictions impacted sales by an estimated 4 percentage points. In addition, strategically planned permanent store closures had an estimated sales impact of about 5 percentage points.

Online sales grew 49% compared with last year. Online represented 46% of net sales in the fourth quarter, which was an increase of over 17 percentage points versus last year. Store sales declined by 28% in the quarter, with impacts from COVID and strategic closures.

Comparable sales for the quarter were flat. The comparable sales calculation reflects online sales and comparable sales days in stores that were open.

Old Navy Global’s net sales increased 5%, with comparable sales up 7%. Old Navy growth continued in the quarter despite the impact of COVID-related store closures and operating restrictions. Online growth and significant improvements to last year in both markdown rate and units per transaction offset store traffic challenges. Momentum continued in casual and cozy categories with strong performance compared to last year in Active, Fleece, and Sleep.

Gap Global’s net sales were down 19% and comparable sales were down 6%, as Gap Brand’s global footprint was meaningfully impacted by COVID-mandated store closures and restrictions in Canada, China, Europe and Japan. Importantly, North America comparable sales were positive.

Banana Republic Global’s net sales were down 27% and comparable sales were down 22%. The new brand leadership team is moving quickly to ensure brand assortment addresses consumer needs in the current, casual environment, as well as closely aligning inventory with demand.

Athleta’s net sales increased 29% with comparable sales up 26%. Promotional activity was well below last year, driving margin expansion in the quarter. As part of Athleta’s long-term growth strategy, new product launches in the quarter, specifically inclusive sizing and sleep, continued to drive brand awareness and customer engagement. New customer acquisition increased 70% versus last year.

Gross margin was 37.7%, an increase of 190 basis points versus last year, well ahead of the company’s prior outlook of being flat versus the year-ago quarter. Rent, occupancy and depreciation savings leveraged 400 basis points, as online sales increased and as the company continued to close unprofitable stores, favorably settle lease liabilities and derive benefit from rent negotiations.

Merchandise margins deleveraged 210 basis points driven by 300 basis points of higher shipping costs associated with increased online sales and carrier surcharges. There were also increases in freight costs that put pressure on the product margin, but despite these increases product margin expanded due to lower promotional activities.

Reported operating expenses were $1.5 billion or 34.7% of sales, a decrease of 640 basis points compared with last year. The significant leverage versus prior year is primarily related to charges of $501 million last year in flagship store impairment and costs related to the previously planned separation of Old Navy.

The company noted it is undergoing a strategic review of its Intermix business. As a result, the company recorded a $56 million impairment charge related to the Intermix trade name as well as store and operating lease assets.

Excluding the impact of impairment charges during the quarter related to Intermix, adjusted operating expenses were 33.4% of sales, in line with the prior guidance range of 33-34% of sales. Store expense savings largely offset the investment in demand generation, with the nominal increase in expenses over last year being mostly driven by real estate termination fees and higher distribution center costs.

Reported operating income was $134 million, or 3.0% of sales, leveraging 820 basis points versus last year’s operating margin, due to prior year flagship store impairments and separation-related costs. Adjusted operating income, excluding the $56 million impairment charge for Intermix, was $190 million, or 4.3% of sales, a decrease of 160 basis points compared with adjusted operating income for the fourth quarter fiscal year 2019.

The effective tax rate was negative 204% for the fourth quarter of fiscal year 2020. The fourth quarter effective tax rate primarily reflects changes in the estimated benefit associated with the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and non-recurring tax benefits related to legal entity structure changes that occurred in the quarter. The non-recurring tax items in the quarter delivered a benefit of approximately $0.45 of EPS.

The effective tax rate for fiscal year 2020 was 40%. The fiscal year 2020 effective tax rate reflects the estimated benefit associated with the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and non-recurring tax benefits related to legal entity structure changes. Excluding these items, there would be a decrease in the effective tax rate of approximately 21 percentage points.

Gap Inc. ended fiscal year 2020 with $2.4 billion in cash, cash equivalents, and short-term investments, compared to $1.7 billion at the end of fiscal year 2019, providing sufficient liquidity to address remaining challenges from the COVID pandemic, support the company’s long-term growth strategy, and return cash to shareholders.

As of the end of fiscal year 2020, while Gap Inc. inventory was up 14% versus the year-ago quarter, markdown inventory ownership was below last year. Despite the higher year over year inventory, the company is pleased with its current inventory composition and is confident that first half assortments and the quality of the inventory composition will enable product margins in the first half of 2021 to be above last year’s levels.

About 10 percentage points resulting from inventory the company strategically held back in the first half of fiscal year 2020 due to COVID-related store closures, which will be introduced for sale during the first half of fiscal year 2021. This inventory was contemplated in our first half receipt plan for 2021, but does drive a temporary increase in its inventory balance.

Higher in-transit inventory due to COVID-related U.S. port congestion and the impact on shipping timelines; and Ownership of COVID-related inventory, such as masks and hand sanitizer, that the company will continue to sell through the first half of FY21.

Full year free cash flow, defined as net cash from operating activities less purchases of property and equipment, was negative $155 million compared with positive $709 million last year. Following the pinnacle of the COVID impact during the first quarter of fiscal year 2020, free cash flow during the last three quarters of the year was approximately $900 million.

Capital expenditures were $392 million compared to $702 million last year, reflecting reduced spending in light of COVID, including a reduction in store capital spending of over 50%.

Gap Inc. ended the year with 3,715 store locations in 45 countries, of which 3,100 were company operated. This compares to 3,345 company-operated stores at the end of last year.

Despite the uncertainty remaining as a result of COVID, the company is providing a fiscal year 2021 financial outlook. This outlook is informed by known COVID conditions and does not incorporate potential unknown and future impacts, including possible further spread in other regions, meaningful deterioration from current trends, and potential disruption from any supply-chain impacts. In addition, this outlook does not include any financial impacts stemming from ongoing strategic reviews, including Europe and Intermix businesses.

For fiscal year 2021, the company expects diluted earnings per share to be in the range of $1.20 to $1.35.

The company expects fiscal year 2021 net sales to reflect mid- to high-teens growth versus fiscal year 2020, which assumes COVID impacts persisting in the first half of 2021 and a return to a more normalized, pre-pandemic level of net sales in the second half of 2021.

The company expects to deliver operating margin of approximately 5% in 2021. The outlook for 2021 is consistent with the company’s Power Plan 2023 objective of achieving at least a 10% operating margin by the end of 2023. Net Interest Expense is expected to be approximately $210 million. Effective Tax Rate is expected to be approximately 25%.

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.

Capital spending is expected to be approximately $800 million in fiscal year 2021. Consistent with Power Plan 2023, the capital spending will primarily support higher return projects including digital, loyalty, and supply chain capacity projects along with investment in store growth for Old Navy and Athleta.

The company announced that its Board of Directors authorized the payment of its previously approved and deferred first quarter fiscal year 2020 dividend of $0.2425 per share. In addition, the company intends to initiate a quarterly dividend in the second quarter of fiscal year 2021 at a level that balances return of capital to shareholders while maintaining the financial flexibility to monitor the ongoing pandemic impacts and invest in growth initiatives. The outlook does not include any share repurchases in fiscal year 2021.

In fiscal year 2021, the company plans to open 30 to 40 Old Navy stores and 20 to 30 Athleta stores, as well as close approximately 100 Gap and Banana Republic stores globally – 75 of those in North America, consistent with the company’s store rationalization plans outlined in the Power Plan 2023 strategy.

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“I am very pleased with our strong finish to the fiscal year even in the face of uncertainty from the ongoing pandemic,” said Katrina O’Connell, Chief Financial Officer, Gap Inc.

“Our sequentially-improving performance, financial discipline and focus on operational excellence have given us confidence in our ability to execute our strategies in 2021, as reflected in the guidance we provided today. And, consistent with Power Plan 2023, we are focused on sales growth, further advancement on fleet restructuring initiatives, customer-facing investments, digital technologies to support our fast-growing online business, and brand marketing in support of our long-term growth aspirations,” continued O’Connell.

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