Supply chain issues take big bite out of Gap; slashes full-year forecast

Gap Inc. delivered disappointing third-quarter results as COVID-related factory closures and ongoing port congestion led to “significant” product delays.

“While we entered the third quarter with growing momentum, acute supply chain headwinds affected our ability to fully meet strong customer demand,” said Sonia Syngal, CEO, Gap Inc.

The company noted that while supply chain constraints continue, it is leveraging increased air freight and port diversification to navigate ongoing delivery challenges for holiday.

“We made an intentional investment in building enduring customer loyalty with accelerated use of air freight to serve them this holiday, choosing long-term growth opportunity over near-term impact to profitability,” Syngal said.

The company said expects the disruption to continue into early 2022.

The supply chain situation continues to be volatile,” CFO Katrina O’Connell said on the chain’s earnings call.

Gap reported a net loss of $152 million, or $0.40 cents per share, for the quarter ended Oct. 3, compared to net income of $95 million, or $0.25 a share, in the year-ago period. Adjusted earnings came to $0.27 per share, missing estimates of $0.50 per share.

Net sales fell 1% to $3.94 billion, with supply chain disruptions driving an estimated 8 percentage point negative impact due to constrained inventory, according to Gap. Analysts had expected sales of $4.44 billion.

Online sales grew 48% compared to the third quarter of 2019 and represented 38% of the total business. Third-quarter comparable sales were up 5% versus 2019.

Net sales and comparable sales by global brand for the quarter were as follows:

• Old Navy: Net sales were up 8% versus 2019. Comparable sales were down 9% year-over-year and increased 6% versus 2019.

Sales in the quarter outpaced available inventory as the brand was disproportionately impacted by supply chain delays, particularly within the women’s assortment.

• Gap: Net sales declined 10% versus 2019, with permanent store closures resulting in an estimated 18% net sales decline. Global comparable sales increased 7% year-over-year and increased 3% versus 2019.

North American two-year comparable sales were positive for the third consecutive quarter, up 13% versus 2019, with net sales only 1% below 2019 levels despite nearly 190 store closures in the region since the third quarter of 2019.

To date, Gap has entered into partnership agreements in the U.K., Ireland, France, and Italy, which are expected to improve the profitability of its European business.

The retailer said the launch of a hoodie from Kanye West’s Yeezy line delivered the most sales by an item in a single day in Gap history with 70% of customers being new to the brand.

Additionally, the company expanded its Gap Home collection at Walmart to include furniture and rugs.

• Banana Republic: Net sales declined 18% versus 2019, with permanent store closures resulting in an estimated 10% sales decline. Comparable sales increased 28% year-over-year and decreased 10% versus 2019.

Banana Republic was able to expand product margins in the quarter compared to both last year and 2019 through lower discount rates and higher selling prices.

[Read More: Banana Republic repositions with reinvented stores, product, experiences]

• Athleta: Net sales were up 48% versus 2019. Comparable sales increased 2% year-over-year and 41% versus 2019.

During the quarter, Athleta expanded its footprint by launching its Canadian online business at the end of August and opening its first company-operated Canadian store in Vancouver at the end of September, followed by its second store which opened in Toronto in November.

The brand is also laying the foundation for greater international expansion with franchise partnerships in Costa Rica and Europe.

• Gap said it continues to expect to open about 30-40 Old Navy and 20-30 Athleta stores in 2021, as well as close approximately 75 Gap and Banana Republic stores in North America.

Gap said now expects full-year revenue to be up about 20%, versus its prior outlook of about a 30% increase. The company lowered its expectations for adjusted full-year earnings to $1.25 to $1.40 per share, down from $2.10 to $2.25 a share. The updated outlook takes into account approximately $550 million to $650 million of lost sales from supply chain constraints and about $450 million in air freight costs for the year.