Gap in big profit surge; takes $53 million charge related to Yeezy line

Gap Inc. returned to profitability in its third quarter even as it dealt with inflationary pressures, excess inventory and fallout related to the termination of its contract with Kanye West (“Ye”). The retailer removed all Yeezy products from its stores in late October.

Similar to many other retailers, Gap gave a cautious outlook for the holiday season, saying it anticipates its overall net sales could be down mid-single digits year-over-year in the fourth quarter of fiscal 2022.

Gap, which is still searching for a CEO following the abrupt departure of Sonia Syngal in July, reported

net income rose to $282 million, or $0.77 per share for the quarter ended Oct. 29, up from a net loss of $152 million, or $0.40 per share, in the year-ago period. Adjusted earnings were $.70 per share. The retailer said it incurred $53 million in impairment charges related to Yeezy Gap.

Revenue rose 2% to $4.04 billion, beating Street estimates of $3.8 billion.

Total comparable sales rose 1%. Online sales rose 5% over last year and represented 39% of total net sales. Store sales increased 1% compared to last year.

Gap’s results by banner are below:

• Gap: Net sales of $1.04 billion were flat with last. Comparable sales increased 4% globally and were flat in North America. 

• Old Navy: Net sales fell 2% to $2.1 billion. Comparable sales fell 1%, amid softer demand for baby and kids’ clothing and demand from lower-income.

• Banana Republic: Net sales rose 8% to $517 million. Comp sales were up 1% as a brand reinvention takes hold.

• Athleta: Net sales rose 6% to $340 million. Comparable sales were flat, as shoppers shifted from athleisure to dressing for work and occasions. 

“We have sharpened our focus on execution to optimize profitability and cash flow, are bringing more rigor to our operations, and balancing our assortments in response to what our customers are telling us,” said executive chairman and interim CEO Bob Martine. “While our efforts show early signs of improvement, we are clear that there is work to be done to deliver what our customers, employees and shareholders expect from Gap Inc.”

Store Openings/Closings

On the company’s earnings call, CFO Katrina O’Connell said Gap plans to open a total 30 Athleta stores and 10 Old Navy locations by the end of this fiscal year.  

The chain also continues to shutter stores as part of its previously announced plan to close 350 stores in North America by the end of fiscal 2023. It has closed 29 Gap and Banana Republic stores in North America so far this year, and will shutter about 30 additional stores by the end of the year.

The retailer made progress during the quarter in reducing its bloated inventory, offering promotions that took a bite out of profits. Inventories were up 12% at the end of the third quarter, compared to 37% in the second quarter.

“While our third quarter results underscore the initial progress we are making toward rebalancing our assortments and reducing inventories, we continue to take a prudent approach in light of the uncertain consumer and increasingly promotional environment as we look to the remainder of fiscal 2022”, O’Connell said in the company’s earnings statement. “In the near-term, we remain focused on the actions necessary to reduce inventory, rebalance our assortments to better meet changing consumer needs, aggressively manage and reevaluate our investments, and fortify our balance sheet.”