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Gap swings to loss amid higher costs, Old Navy woes

Gap’s largest division, Old Navy, took a beating in the first quarter.

Gap Inc. reported a first-quarter loss and declining sales, and slashed its annual guidance to reflect an uncertain macroeconomic environment, inflation pressures and “executional” challenges at its largest division: Old Navy.

Gap reported a loss of $162 million, or $0.44 a share, for the quarter ended April 30, compared to net income of $166 million, or $0.43 a share, in the year-ago period.  Operating loss was $197 million in the quarter, versus an operating profit of $240 million a year ago.

Net revenue declined 13% to $3.48 billion, topping the $3.46 billion expected by analysts. Total comparable sales were down 14%.  In-store sales fell 10% and online sales declined 17%.

“Our Q1 results and updated fiscal 2022 outlook primarily reflect industry-wide headwinds as well as challenges at Old Navy that are impacting our near-term performance,” said Sonia Syngal, CEO. “While we are disappointed to deliver results below expectations, we are confident in our ability to navigate the headwinds and re-stabilize the Old Navy business in order to deliver continued progress on our long-term strategy.”

The slowdown at Old Navy did not come as a surprise. In April, Gap warned of challenges at the brand and said that company veteran Nancy Green, president and CEO of Old Navy, was stepping down. Syngal is helping to lead the division while it searches for a replacement.

Here is a breakdown of Gap sales by brand:

Old Navy: Net sales fell 19% $1.8 billion as same-store sales plunged 22%. Sales in the quarter were negatively impacted by size and assortment imbalances, ongoing inventory delays and “product acceptance issues” in some key categories,” the company stated.

Last August, Old Navy launched a major push into inclusive sizing that included offering every one of its women’s styles, in every size, with no price difference.  On the company’s earnings call, Syngal said that Old Navy “over planned large sizes, and was out of stock in some core sizes due to supply chain disruptions.” She also said Old Navy had category misses and excess inventory in some less relevant categories.

“We need to rebalance inventories,” Syngal said.

Gap: Net sales fell 11% to $791 million and same-store sales fell 11%. The brand was slightly impacted by slowed demand stemming from inflationary pressures impacting the lower-income consumer and ongoing inventory lateness.  Growth was also negatively impacted by the COVID-related forced lockdowns and slowed overall demand in China.

Banana Republic: Net sales rose 24% to of $482 million and same-store sales jumped 24%. The retailer said the brand is realizing the benefits of last year’s relaunch which is resonating with consumers particularly in light of the near-term shift into occasion and work-based categories.

Athleta: Net sales rose 4% to $360 million; same-store sales fell 7%.

Gap CFO Katrina O’Connell said the company revised its 2022 outlook to reflect the impact “of certain factors impacting our near-term performance, including execution challenges at Old Navy, an uncertain macro consumer environment, inflationary cost headwinds and a slowdown in China that is impacting Gap Brand.”

“We expect our performance to improve modestly in the back half of the year and accelerate as we enter fiscal 2023,” she said.

The company now expects fiscal 2022 revenue to decline in the low to mid-single digit range versus last year.  Gap forecast adjusted earnings of $0.40 to $0.70 a share for the year, down from a prior range of 1.85 and $2.05.

The company ended the quarter with 3,414 store locations in more than 40 countries, of which 2,825 were company operated.

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