Gap swings to loss as sales tumble, withdraws outlook; CEO search continues

Gap Inc. reported a second-quarter loss amid ongoing execution challenges, and problems at its largest division, Old Navy, where comparative sales fell 15%.

Similar to many other retailers, Gap is feeling the impact of softening consumer demand due to inflation, which is taking a particular toll on lower-income customers, elevated inventory levels and economic uncertaintly. The retailer is also dealing with shifting consumer trends that favor dressing up over the more casual and active styles offered by its  namesake, Old Navy and Athleta brands.

In addition, Gap is searching for a new CEO following the abrupt departure of Sonia Syngal in July.

In the near-term, Gap said it is taking actions to sequentially reduce inventory, rebalance assortments to better meet changing consumer needs, aggressively manage and reevaluate investments, and fortify its balance sheet.  

 “We believe these are the right initial steps to position Gap Inc. back on its path toward growth, margin expansion, and delivering value for our shareholders over the long term,” said Katrina O’Connell, executive VP and CFO, Gap Inc.

Gap said it was withdrawing its prior fiscal 2022 outlook given the actions the company has underway, the CEO transition and the “uncertain macro-environment.”

In recent actions, Gap opened a high-tech fulfillment center to support its digital sales growth. It also launched a third-party supply chain platform.

Gap swung to a loss of  $49 million, or $0.13 a share, for the quarter ended July 30, compared to earnings of $258 million, or $0.67 a share, in the year-ago period. Adjusted for one-time items, the retailer earned $0.08 cents a share.

The company also reported an operating loss of $28 million compared to an operating gain of $409 million in last year’s quarter.

Net sales fell 8% to $3.86 billion, down from $4.2 billion a year ago but topping estimates for $3.82 billion.   Online sales fell 6%, and accounted for 34% of total sales.   

North America comparable sales were down 10%, with the biggest drop at Old Navy, where comp sales declined 15%, and net sales fell 13% to $2.1 billion. The company cited assortment imbalances, ongoing inventory delays, “product acceptance” issues in some key categories and slowing demand from lower-income consumer.

Other division results are below.

• Gap’s net sales fell 10% to $881 million. Global comparable sales fell 7%. The decrease was driven by store closures, inflationary pressures and category mix “imbalances.”
• Banana Republic’s net sales rose 9% to $539 million. Comparable sales rose 8%. The company said the brand is benefitting from last year’s relaunch and the shift in consumer trends.
• Athleta’s net sales inched up 1% to $344 million.  Comparable sales fell  8%, with the company citing a shift in consumer preference from athleisure to occasion and work-based categories. 

“Gap Inc.’s iconic brands, powerful assets, well-established values and scaled omni-platform are central to our strategic direction,” stated said executive chairman Bob Martin, who is acting as interim CEO.  “Our team has the capabilities to deliver what our customers, and our shareholders, expect -- what’s needed for profitable growth. Importantly, as we adopt behaviors that enable sustainable change, I’m confident we will unleash our potential and drive value creation over the long term.”

Gap ended the quarter with 3,390 store locations in more than 40 countries, of which 2,799 were company-operated.