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The Cost of COVID-19: Gap Inc. Loses $932 Million in First Quarter

David Moin

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Gap Inc., like other retailers selling nonessentials, suffered dearly in the first quarter due to COVID-19, reporting a loss of $932 million in the last quarter, compared to a $227 million profit in the year-ago period.

Gap Inc. during the quarter was forced to close 90 percent of its global store fleet beginning March 19, pulling revenues down to $2.1 billion from $3.7 billion in the first quarter of 2019. The operating loss was $1.2 billion in the quarter ended May 2. Stores around the world began reopening on May 9.

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The company cited lost sales and corresponding merchandise margin from the temporary store closures, a non-cash impairment charge of $484 million related to store assets and operating lease assets, as well as a $235 million non-cash inventory impairment charge, for contributing to the huge loss.

The company saw double-digit gains online and enacted several measures to strengthen its cash position, as well as secured additional financing early in the second quarter, putting the retailer in “a solid financial position to weather the pandemic,” Gap said in its earnings release Thursday. The company also said it leveraged its omni-capabilities to continue to serve customer demand online through its scaled e-commerce platform.

“Our teams’ ability to pivot quickly and lean into our strong online business resulted in an encouraging 40 percent online sales growth in April,” said Sonia Syngal, president and chief executive officer of Gap Inc. “While net sales and stores sales continued to reflect material declines in May as a result of closures, we saw over 100 percent growth in online sales during the month. This online momentum, enabled by new omni-capabilities that have expanded the way customers can shop with us, leaves us well-positioned to fuel our brands going forward.”

Syngal added, “Today we have more than 1,500 stores open in North America, ahead of plan, and as stay-at-home restrictions ease in many markets, we expect to have the vast majority of our North American stores reopened in June. We are optimistic that the actions we’ve taken will provide a stable foundation as we navigate near-term uncertainty and refashion Gap Inc. for long-term growth.”

Back in April, Gap Inc. stopped paying rent on stores that were closed due to COVID-19 and warned that it could face legal action while believing it was legally justified to not pay the rent. Last month, the Simon Property Group, the nation’s largest mall owner and operator, said it expected its tenants to pay rent even if the stores were closed. So on Thursday, Simon filed suit against Gap in a Delaware court, claiming Gap failed to pay almost $69.5 million in rent and other charges. Gap Inc., which operates Gap, Old Navy, Banana Republic, Athletic and Intermix stores, is Simon’s largest specialty store tenant.

Old Navy’s sales were down 42 percent, with store sales down 60 percent and online sales up 20 percent. Off-mall, strip real estate that makes up about 75 percent of the fleet will be an advantage as customers return to stores and it expects traffic in these locations to ramp up more quickly than other formats, the company said.

Gap brand’s net sales were down 50 percent, with store sales down 64 percent and online sales down 5 percent. Part of the blame for the poor performance was attributed to “inconsistent execution of product and marketing messages” though there was some upside online as the quarter progressed and customers migrated to shopping digitally.

Banana Republic’s nets sales were down 47 percent, with store sales down 61 percent and online sales down 2 percent. The poor performance was partly blamed on the brand’s lack of casual, stay at home merchandise, but shifts in the mix are in the works.

Athleta’s net sales were down 8 percent; store sales were down 50 percent while  online sales rose 49 percent. “Customer response to Athleta was strong given the values-driven active and lifestyle space the brand participates in as well as the brand’s deep customer engagement through its powerful omnichannel model,” Gap Inc. said.