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Gap announces financial results

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Gap Inc., a collection of purpose-driven lifestyle brands including Old Navy, Gap, Banana Republic and Athleta, reported its financial results for the second quarter of fiscal year 2020, ending 1st August.

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Gap Inc. second quarter results improved meaningfully compared to the first quarter with online sales nearly doubling year-over-year as the company leveraged its omni capabilities through its scaled e-commerce platform. While nearly all stores were temporarily closed due to the COVID-19 pandemic at the start of the second quarter, the company worked to quickly reopen stores where permitted beginning early in the quarter using industry-leading safety measures for customers and employees. The company delivered positive operating income and improved its cash balance by over $1 billion compared to the first quarter, ending the quarter with a cash and cash equivalents balance of $2.2 billion.

“Our strong performance in the second quarter reflects the customer response to our brands, products and experiences, particularly as we’ve rapidly adapted to the changing environment. We nearly doubled our e-commerce business, with approximately 50% online penetration, demonstrating our ability to pivot to a digitally-led culture,” said Sonia Syngal, Chief Executive Officer, Gap Inc.

“I am confident that our purpose-driven lifestyle brands, size and scale, and advantaged digital capabilities are helping us win now and position us for growth in the future,” continued Sonia.

Net sales were down 18% year-over-year, reflecting a 95% increase in online sales, offset by a 48% decline in store sales, which were impacted by partial closures during the quarter. During May, Gap Inc. began reopening stores previously closed as a result of the COVID-19 pandemic, with approximately 90% of its global fleet open as of 1st August.

Second quarter fiscal year 2020 comparable sales were up 13%, driven by the strength of Gap Inc.’s scaled e-commerce business, which added over 3.5 million new customers during the quarter. The comparable sales calculation reflects online sales and comparable sales days in stores that have reopened.

Old Navy Global’s net sales were down 5% reflecting an increase in online sales of 136%, offset by a 36% decline in store sales. Comparable sales were up 24%. Old Navy continued to experience meaningful acceleration in its online business as strong customer response to product was further bolstered by compelling and relevant digital marketing investment. As customers returned to stores, the brand’s off-mall and strip real estate locations, which make up approximately 75% of the brand’s fleet, ramped up more quickly than other formats and continue to be an advantage.

Gap Global’s net sales were down 28% reflecting an increase in online sales of 75%, offset by a 55% decline in store sales. Comparable sales were up 12%. As the brand’s fleet rationalization efforts continue, the brand remains focused on maximizing online demand through relevant marketing, improved execution and customer engagement.

Banana Republic Global’s net sales were down 52% reflecting an increase in online sales of 26%, offset by a 71% decline in store sales. Comparable sales were down 27%. Banana Republic continues to focus on taking action to adjust to consumer preferences and improve inventory mix as the shift to casual fashion during the stay-at-home requirements has left the brand’s work wear assortment disadvantaged.

Athleta’s net sales were up 6% reflecting an increase in online sales of 74%, partially offset by a 45% decline in store sales. Comparable sales were up 19%. The brand continues to benefit from the highly relevant values-driven active and lifestyle space in which it participates, further fueled by the brand’s deep customer engagement through its powerful omni-channel model.

Gross margin was 35.1%, a decline of 3.8 percentage points versus last year, as a result of increased shipping expense as online sales grew and the company leveraged its stores to fulfill strong online demand. Gross margin also reflects rent and occupancy deleverage from the impact of lost sales due to store closures, partially offset by lower promotional activity at Old Navy, Gap and Athleta.

Operating expenses were $1.1 billion, a decrease of $198 million versus last year, primarily due to a decrease in store payroll and benefits and other store expenses resulting from store closures during the quarter. As a percentage of net sales, operating expenses were 32.9%, an increase of 1.1 percentage points driven by lower net sales.

Operating income was $73 million or 2.2% of net sales.

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During the quarter Gap Inc. completed the issuance of $2.25 billion of senior secured notes and redeemed $1.25 billion of previously issued unsecured notes. As a result, the company recorded a loss on extinguishment of debt of $58 million primarily related to the make-whole premium and incurred $56 million of net interest expense which reflects the higher principal and higher interest rates associated with the new debt.

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