The Gap Inc. GPS reported dismal top and bottom-line results in first-quarter fiscal 2020. Results were mainly impacted by the temporary closure of nearly 90% of the company’s stores worldwide due to the coronavirus outbreak, which led to a loss of sales and resulting merchandise margin. Further, results included non-cash impairment charges of $484 million on store and operating lease assets, and $235 million on excess inventory.
Nevertheless, the company witnessed strong online demand and leveraged its omni-channel capabilities to fulfill online orders and serve customers. This resulted in online sales growth of 40% in April.
However, driven by the prevailing uncertainty, the company did not currently provide guidance for fiscal 2020.
Shares of Gap declined 5.5% in the after-hours trading session on Jun 4, owing to the dismal fiscal first-quarter performance and uncertainty surrounding the future. In the past three months, shares of the Zacks Rank #3 (Hold) company have lost 8% compared with the industry’s 9.8% decline.
Subsequent to the end of the fiscal first quarter, the company witnessed material declines in net sales and in-store sales in May due to store closures, while it witnessed nearly 100% growth in online sales during the month. Furthermore, it re-opened nearly 1,500 stores in North America as of Jun 4. This represents nearly 55% of the company’s 2,800 stores in North America. With the easing of stay-at-home orders in many states, it expects almost the entire of North America store fleet to be operational in June.
Notably, the company has been witnessing robust store traffic and productivity at stores, particularly Old Navy and Athleta. However, it plans to move ahead conservatively due to several uncertainties in demand trends and consumer behavior. Consequently, it expects to lean its supply-chain and omni-channel capabilities in sync with customer demand levels.
In the fiscal first quarter, the company’s loss of $2.51 per share lagged the Zacks Consensus Estimate of a loss of 65 cents, whereas it recorded earnings per share of 60 cents in the year-ago quarter.
The Gap, Inc. Price, Consensus and EPS Surprise
The Gap, Inc. price-consensus-eps-surprise-chart | The Gap, Inc. Quote
Net sales declined 43% year over year to $2,107 million and missed the Zacks Consensus Estimate of $2,405 million. Sales were hurt by the significant decline in demand after the temporary store closures in mid of March, which more than offset the strong momentum in the first 35 days of the quarter when stores were operational.
Nonetheless, the company continued to operate through its e-commerce channel, which led to nearly a 13% year-over-year increase in online sales in the fiscal first quarter. Further, the company notes that the momentum in online sales continued in the fiscal second quarter. Meanwhile, its in-store sales declined 61% in the fiscal first quarter due to the extended store closures.
Additionally, the company did not provide comparable sales (comps) results for the quarter as the metric is not meaningful in light of the temporary store closures. However, it provided net sales, which include store sales and online sales, by brand.
Brand-wise, net sales were down 42%, 50%, 47% and 8% at Old Navy Global, Gap Global, Banana Republic Global and Athleta brands, respectively. The company witnessed significant declines in in-store sales for all formats, with Old Navy down 60%, Gap down 64%, Banana Republic down 61% and Athleta down 50%. Meanwhile, there was a significant acceleration in the digital business for Old Navy and Athleta brands, recording increases of 20% and 49%, respectively.
For the Gap brand, the performance was affected by inconsistent execution of product and marketing messages, prior to the onset of the pandemic. However, the company saw gradual improvements in the brand’s online sales throughout the quarter, given its strategy to migrate customers online due to the rationalization of its store fleet. Consequently, online sales declined 5% at the Gap brand.
At Banana Republic, the company’s product mix was unfavorable due to the sudden shift of consumers’ demand to more casual fashion to meet stay-at-home requirements. This led the brand to undertake aggressive actions to adjust the inventory mix to suit consumer preferences. Online sales for the brand dipped 2% in the fiscal first quarter.
Gross profit in the quarter under review was $268 million, reflecting a significant decline from $1,344 million in the prior-year quarter. Gross margin of 12.7% declined 23.6 percentage points from the prior-year quarter. More than half of the decline was due to a fall of 13.7 percentage points in merchandise margin, owing to a $235-million inventory impairment charge recorded in the quarter. This accounted for nearly 11 percentage points of deleverage in merchandise margin. The remaining merchandise margin deleverage was primarily related to increased promotional activity across all brands.
Meanwhile, rent and occupancy increased 9.9 percentage points due to the decline in net sales on the extended COVID-19 outbreak-related store closures. The company notes that it suspended rent payments starting April. However, for accounting purposes, accrued rent payments got reflected in gross margin for the reported quarter.
Operating loss of $1,244 million in the reported quarter was attributed to gross margin decline as well as $484 million of impairment charge related to store and operating lease assets.
Gap ended the fiscal first quarter with cash and cash equivalents of $1,028 million, and total stockholders’ equity of $2,317 million. Notably, short-term debt increased to $500 million, owing to a full drawdown on its revolving credit facility. The company’s long-term remained unchanged at $1,250 million.
Following the end of the fiscal first quarter, the company issued $2,250 million worth of senior secured notes. The proceeds from this issue will be used to pay down $1,250 million of senior notes due April 2021. Further, the company used the proceeds to repay the $500 million borrowed on its revolving credit facility. It also secured a $1,868 million of asset-based revolving credit facility, which replaced the existing unsecured revolving credit facility.
Consequently, as of Jun 4, the company had $1,868 million available for use. This new capital provides sufficient liquidity to steer the coronavirus environment.
In the wake of the COVID-19 pandemic, the company expects to cut its capital expenditure for fiscal 2020 by 50%. It now expects capital spending of $300 million for fiscal 2020, including $30 million of expansion costs related to its Ohio distribution center.
As on May 2, Gap had 3,911 stores in 42 countries, out of which 3,313 were company-operated and 598 were franchise outlets.
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