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Gap announces financial results


Gap Inc., a portfolio of purpose-led, billion-dollar lifestyle brands including Old Navy, Gap, Banana Republic, and Athleta, and the largest specialty apparel company in the U.S., reported second quarter fiscal year 2021 diluted earnings per share of US$0.67.

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Excluding charges primarily associated with strategic changes to its operating model in Europe, adjusted earnings per share were US$0.70. The company raised its full year reported diluted earnings per share guidance to be in the range of US$1.90 to US$2.05, and US$2.10 to US$2.25 on an adjusted basis.

“Our talented teams delivered our highest second quarter net sales in over a decade. Our strategy is driving growth as evidenced by continued strength at Old Navy and Athleta, Gap Brand’s second consecutive quarter of positive 2-year comparable sales in North America, and momentum gaining at Banana Republic. Stepped-up marketing investments, improved brand management, and technology enhancements are paying off as our brand power cuts through,” said Sonia Syngal, CEO, Gap Inc.

“I look forward to our Integrated Loyalty Program and Old Navy’s inclusive shopping experience, BODEQUALITY, taking hold in the back half, both key components of our Power Plan 2023, and important drivers of long-term sustainable growth,” continued Syngal.

Due to the impact of COVID-related store closures last year, financial comparisons for the quarter are being made primarily against 2019. Financial results for the second quarter of fiscal 2020 and 2019 can be found in the tables at the end of this press release.

The company’s second quarter fiscal year 2021 net sales of US$4.2 billion were up 5 percent compared to 2019.

Strategic permanent store closures and the recent divestures of the Janie & Jack and Intermix businesses reduced net sales by approximately 8 percent versus 2019. In addition, the company estimates that COVID-related closures in markets outside of the U.S. resulted in approximately 2 percent of sales decline versus 2019.

Comparable sales were up 3 percent year-over-year, and up 12 percent versus 2019. The comparable sales calculation reflects online sales and comparable sales days for stores that were open on the same days in both the current and prior comparable period.

Old Navy Global’s net Sales were up 21 percent versus 2019, with Old Navy maintaining its position as the #2 apparel brand in the U.S. Comparable sales were flat to last year and up 18 percent versus 2019. A strong consumer response to the loyalty launch drove customer acquisition, propelling Old Navy’s customer file to an all-time high in the quarter. As Fall approaches, the brand is leveraging its position as the #2 Kids & Baby brand this back-to-school season. In addition, category expansion, including the brand’s recent inclusive sizing launch, BODEQUALITY, demonstrates the brand’s focus on the Democracy of Style and positions Old Navy as one of the largest retailers to address the full size-range within the $120 billion women’s apparel market.

Gap global’s net sales declined 10 percent versus 2019, with permanent store closures resulting in an estimated 14 percent sales decline, and international COVID-closures driving an estimated 1 percent decline on a 2-year basis. Global comparable sales declined 5 percent year-over-year and increased 3 percent versus 2019.

In North America, comparable sales growth of 12 percent on a 2-year basis was led by strength in key categories, including sleep, active and fleece. Gap’s Partner to Amplify strategy progressed during the quarter as the Gap Home partnership with Walmart launched, reaching millions of Walmart customers. Additionally, the brand completed the first Yeezy Gap Presale with the Round Jacket generating a strong response with 75 percent of pre-order customers being new to the brand.

Banana Republic global’s net sales declined 15 percent versus 2019, with permanent store closures resulting in an estimated 10 percent sales decline, and international COVID-closures driving an estimated 1 percent decline on a 2-year basis. Comparable sales were up 41 percent year-over-year and down 5 percent versus 2019. Both net sales and comparable sales reflected meaningful improvement from the first quarter of 2021. Strong execution and product assortment drove brand relevance resulting in lower discounting. Moving into Fall, the brand will focus on bringing affordable luxury to consumers through an enhanced site and store experience.

Athleta’s net sales were up 35 percent versus 2019. Comparable sales grew 13 percent year-over-year and 27 percent versus 2019. Performance Lifestyle products performed well as customers went back to work and engaged in more activities while still valuing comfort. Inclusive sizing, which launched last quarter, continues to perform well, building deep customer loyalty. Additionally, partnerships with world-class athletes resulted in increased brand awareness, which now sits at 33 percent according to YouGov. The brand looks to build on the success of the second quarter with its launch of AthletaWell, an immersive digital platform designed to build loyalty, engagement and a community of empowered women. In addition, following next week’s launch of Athleta online in Canada, the brand will soon be opening stores in Toronto and Vancouver.

Gap Inc. second quarter online sales grew 65 percent versus the second quarter of 2019 and represented 33 percent of the total business. Store sales declined 11% versus the second quarter of 2019, primarily due to 11 points of impact from divestitures and strategic closures and an estimated 2 point decline due to COVID-closures outside of the U.S.

Compared to the second quarter of fiscal 2019, 2021’s gross profit is US$1.82 billion, an increase of US$267 million or 17 percent. Gross margin is 43.3 percent, an increase of 440 basis points. Key drivers were rent, occupancy and depreciation (ROD) leverage of 330 basis points primarily related to online growth, store closures and renegotiated rent.

Merchandise margin expanded 110 basis points due to strong product acceptance and lower discounting, offsetting approximately 130 basis points in higher shipping costs related to strong growth in the company’s online business.

Reported operating expenses were US$1.4 billion or 33.6 percent of net sales. Costs primarily related to changes in the company’s European operating model resulted in charges of US$19 million. Adjusted operating expenses for the quarter were US$1.4 billion or 33.1 percent of net sales, an increase of 260 basis points versus 2019 adjusted operating expenses.

Store expense leverage of approximately 150 basis points helped to partially offset investments in demand generation, such as marketing, which drove an increase of 230 basis points versus 2019. Additionally, compensation costs increased approximately 200 basis points compared to 2019 due to improved performance.

Second quarter operating margin was 9.7 percent. Adjusted operating margin was 10.2 percent, up 190 basis points versus 2019’s second quarter adjusted operating margin. The effective tax rate for the second quarter was 28 percent. The company ended the quarter with 376 million shares outstanding.

Diluted earnings per share were US$0.67. Excluding charges primarily related to changes in the company’s European operating model, adjusted diluted earnings per share were US$0.70.

In the second quarter, the company paid a dividend of US$0.12 per share. In addition, the company repurchased US$55 million of shares in the quarter, as part of its plan to repurchase up to a total of US$200 million of shares in fiscal year 2021. Ending inventory was up 2 percent compared to the second quarter of 2020. Versus the second quarter of 2019, inventory was down 2 percent.

The company ended the second quarter of fiscal year 2021 with US$2.7 billion in cash, cash equivalents and short-term investments. Year-to-date free cash flow, defined as net cash from operating activities less purchases of property and equipment, was US$523 million.

Fiscal year-to-date capital expenditures were US$269 million. The company ended the second quarter of fiscal year 2021 with 3,494 store locations in over 40 countries, of which 2,937 were company operated.

SEE ALSO : Gap sells off Intermix brand

“Our strong second quarter performance, demand for our purpose-led, billion-dollar lifestyle brands, and ongoing strength of the customer gives us confidence to raise our sales and earnings outlook for the second consecutive quarter. As we fuel profitable growth for the back half and beyond, we are focused on strategic expansion of addressable markets to take share, building customer lifetime value and launching new initiatives to digitally transform Gap Inc. for the future,” said Katrina O’Connell, Executive Vice President and Chief Financial Officer, Gap Inc.