Gap Inc., a collection of purpose-led lifestyle brands including Old Navy, Gap, Banana Republic and Athleta, reported its financial results for the third quarter of fiscal year 2020, ending 31st October.
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Gap Inc. third quarter results reflected flat sales versus last year, supported by 5% growth in comparable sales which was driven by a 61% increase in online sales. Net sales were impacted by the company’s ongoing strategy to close unprofitable stores. Gross margin increased 160 basis points versus last year, to 40.6%.
For the quarter, Gap Inc. delivered $0.25 earnings per diluted share, reflecting gross margin improvement versus the prior year, partially offset by higher operating expenses, including a significant increase in marketing support across all brands.
“Our third quarter results reflect our Power Plan 2023 in action—specifically the strength of our online business, which comprised 40% of sales, and our commitment to meeting the shopping preferences of our customers through our leading omni platform,” said Sonia Syngal, Chief Executive Officer, Gap Inc.
“With our teams focused on sales growth and returning to profitability, we have made investments in demand generation that are driving engagement, particularly in this dislocated market as customers are looking to trusted brands to provide easy and safe shopping options,” continued Sonia.
Net sales were flat year-over-year, reflecting a 61% increase in online sales, offset by a 20% decline in store sales. Notably, 40% of the company’s sales were online in the third quarter. The company aspires to achieve 50% of its sales from online by the end of 2023.
Third quarter fiscal year 2020 comparable sales were up 5%, driven by the strength of Gap Inc.’s scaled e-commerce business, which added over 3.4 million new customers during the quarter. The comparable sales calculation reflects online sales and comparable sales days in stores that were open.
Net sales and comparable sales by brand for the third quarter 2020 compared to the third quarter 2019 were as follows:
Old Navy Global’s net sales increased 15%, with comparable sales up 17%. 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. During the quarter, active offerings grew over 55%. Notably, Old Navy’s U.S. Kids & Baby apparel business added meaningful market share to become the #1 brand in that segment.
Additionally, the brand’s off-mall and strip real estate locations, which make up approximately 75% of the brand’s fleet, continue to be an advantage, supporting not only in-store sales but customers’ omni purchases, through curbside and buy-online-pickup-in-store (BOPIS).
Gap Global’s net sales were down 14% and comparable sales were down 5%. This reflects a reduced store fleet and lower traffic trends partially offset by strong online performance. The brand remains focused on maximizing online demand through relevant marketing, improved execution and customer engagement. In particular, the brand’s Fall marketing campaigns “Stand United” and “Be the Future” generated positive customer response.
Banana Republic Global’s net sales were down 34%, a slight improvement versus the second quarter. Comparable sales were down 30%. Banana Republic continues to focus on adjusting to consumer preferences and improving inventory mix by shifting away from the brand’s traditional work wear assortment and into casual fashion during the current stay-at-home environment.
Athleta’s net sales were up 35%. Comparable sales were the highest in the brand’s history—up 37%—and online contribution remained above 50% in the quarter. Athleta continues to benefit from its participation in the highly relevant values-driven active and lifestyle space, strong returns from increased digital marketing investments, and a focused product strategy, which is driving a healthy regular price business. While performance was strong across the brand, masks continued to attract new customers, providing the opportunity to build a relationship across other product offerings.
Gross margin was 40.6%, a 160 basis point improvement versus last year. This improvement is consistent with the strategic focus outlined in last month’s Power Plan 2023 discussion of opening highly-profitable Old Navy and Athleta stores, while also closing select unprofitable Gap and Banana Republic stores, yielding significant rent and occupancy savings. In addition, a lower level of promotions contributed to higher product margins in the quarter. The benefits of lower rent and occupancy and higher product margin were partially offset by higher shipping expenses associated with the company’s growth in online sales.
Operating expenses were 36.2% of sales, an increase of 270 basis points versus last year, reflecting over 175 basis points in higher marketing investment across all brands and approximately 140 basis points in spending to support health and safety measures in stores.
Operating expenses were also impacted by approximately 120 basis points in costs associated with store closures that were mostly offset by rent and occupancy benefits reflected in gross margin. These increases were partially offset by approximately 200 basis points in one-time costs in the year-ago quarter primarily related to the company’s previously planned separation of Old Navy.
Operating income was $175 million or 4.4% of net sales.
Gap Inc. ended third quarter fiscal year 2020 with $2.6 billion in cash, cash equivalents, and short-term investments, compared to $1.1 billion at the end of the third quarter in fiscal year 2019, providing ample liquidity to support the company’s long-term growth strategy.
As of the end of its third quarter fiscal year 2020, Gap Inc. inventory was up 1% versus the year-ago quarter. Excluding pack & hold inventory that is being held for introduction into the marketplace in 2021, ending inventory was down about 7%, reflecting the company’s focus on working capital management.
Gap Inc. ended the quarter with 3,785 store locations in 43 countries, of which 3,178 were company-operated. This compares to 3,396 company-operated stores in the third quarter last year. As part of ongoing fleet optimization efforts supporting its long-term strategic priority of a smaller healthier fleet, the company reiterates its intention to close approximately 225 Gap and Banana Republic stores globally, net of openings, in 2020.