Sonia Syngal

Gap Inc., crediting macro tailwinds and growth strategies taking hold, swung into profitability last quarter amid huge comparable sales gains.

The San Francisco-based operator of Gap, Old Navy, Banana Republic and Athleta reported a net profit of $166 million for the quarter ended May 1, versus a loss of $932 million in the year-ago period. Earnings per share were 44 cents versus a loss of $2.51 in the 2020 quarter.

Operating profits rose to $240 million compared to a loss of $1.24 billion in the year-ago period.

Net sales rose 89 percent to $3.99 billion last quarter from $2.11 billion a year ago, and were 8 percent above the 2019 quarter. Comparable sales were up 28 percent year-over-year, and up 13 percent from 2019.

Online sales grew 82 percent from the first quarter of 2019 and represented 40 percent of the total business. Store sales declined 16 percent versus the first quarter of 2019, primarily due to strategic closures and COVID-19 closures outside of the U.S.

“Our Power Plan 2023 is taking hold,” said Sonia Syngal, chief executive officer of Gap Inc., on Thursday. “Investments in demand-generation, coupled with macro tailwinds, supercharged our brands. Gap Inc. delivered sales growth of 8 percent over 2019 pre-COVID-19 levels, with particular strength at Old Navy and Athleta, a healthy and growing Gap business in North America, and market share gains that outpaced the industry.”

The company estimated that COVID-19-related closures in markets outside of the U.S. resulted in approximately 2 percent of sales decline versus 2019. Additionally, permanent Gap and Banana Republic store closings, as part of the “Power Plan 2023” strategy, reduced net sales by about 5 percent versus 2019 but were earnings accretive.

Gap Inc.’s Power Plan three-year strategy was introduced last fall. It focuses on growing the Old Navy and Athleta brands while downsizing Gap and Banana Republic and shedding small businesses. Recently, Intermix was sold to Altamont Capital Partners, Janie and Jack was sold to Go Global Retail, and the Hill City men’s brand was discontinued.

There continues to be enormous anticipation for the upcoming Yeezy-Gap collaboration. Yeezy is Kanye West’s clothing line. “We love the enthusiasm. It’s the number-one question we get,” Syngal said during a conference call with retail analysts. “And every day with customers and across social media, we see the hype building from speculation around the product to supposed launch dates. YEEZY Gap is a work in progress and remains a significant opportunity for us. And will it be Q2 or Q3 — we’ll see. What I can tell you is that the creativity is through the roof and it’s spilling over to the brand. And it’s inspiring our teams more broadly. So we are very energized by what we’re seeing, and we know our customers will be too.”

Describing last quarter’s momentum, Syngal said, “As stores’ traffic came back, we sustained our digital dominance with 82 percent online growth versus 2019. And while active and fleece continue to soar, we saw a resurgence in summer fashion with dresses rebounding, showing that customers are emerging from the crisis wanting to express their style without sacrificing the comfort and digital convenience they’ve become accustomed to. Through the power of our brands, platform and portfolio, we deliver it all.”

Katrina O’Connell, executive vice president and chief financial officer, added: “The actions we’ve taken, aligned with our Power Plan 2023 strategy, to reduce discounting, restructure our fleet, and divest our smaller businesses are enabling continued investment in growth and driving us toward our operating margin goal of 10 percent in 2023.…We’re optimistic that the consumer will remain strong particularly in the U.S., and that ouri conic brands, well located stores and digital advantage will remain relevant as consumers transition back to work and back in school. This was the largest Q1 revenue in the company’s history,” with standout performances by Old Navy and Athleta, O’Connell said.

Several retailers, including Macy’s Inc. and Abercrombie & Fitch Co., also reported strong first-quarter results due to government stimulus, the rollout of vaccinations and decline in COVID-19 cases, as well as people starting to go out again.

The results prompted Gap to raise its full-year diluted earnings per share guidance to be in the range of $1.55 to $1.70. Excluding charges associated with divestiture activity related to the Janie and Jack and Intermix businesses, full-year EPS on an adjusted basis are expected to be in the range of $1.60 to $1.75, a 40 percent hike from the previous outlook.

While the quarter was impressive, Gap Inc. does face challenges, among them rising shipping costs; pandemic-related supply chain and raw material headwinds, particularly in India where the COVID-19 outbreak is catastrophic, and port congestion. In addition, the company is reviewing strategic options in France, Italy, the U.K. and Ireland involving evaluating distribution channel options; there is continued pandemic-related restrictions in Canada, China, Japan and Europe, and there is  uncertainty over COVID-19 cases possibly spiking again in other parts of the world. Gap stated that the outlook “does not include potential impacts of our ongoing strategic review of the European business. In addition, the company continues to closely monitor the impact of COVID-19-related store closures globally, as well as challenges related to the supply chain and port congestion.” While Old Navy and Athleta remain strong, Gap Inc. continues to repair the Gap and Banana Republic brands.

Still, the retailer now expects net sales growth for fiscal-year 2021 to be in the low- to mid-20 percent range versus 2020, an increase versus the previous guidance of mid- to high teens. The outlook reflects lost revenue from divesting Janie and Jack and Intermix, which together represented about 2 percent of annual company sales.

By division, Old Navy Global saw net sales rise 27 percent versus 2019; comparable sales were up 35 percent year-over-year and up 25 percent versus 2019. The gains were attributed to “compelling product storytelling, values-driven messaging, customer acquisition and strong transaction metrics.” Executives said key categories like active and fleece remained strong, the recent expansion into intimates and a more inclusvie size range also drove sales, and seasonal categories are now trending favorably as consumers move into a new phase of pandemic recovery, planning vacations and summer activities.

At Gap Global, net sales declined 16 percent versus 2019, with permanent store closures resulting in an estimated 11 percent sales decline, and international COVID-19 closures driving an estimated 4 percent decline on a two-year basis. Comparable sales increased 29 percent year-over-year and decreased 1 percent versus 2019.

The Gap North America business reported first-quarter comparable sales up 9 percent on a two-year basis. O’Connell said Gap brand has become more digitally led and is “realizing the margin benefit of closing unprofitable stores, while also reinvigorating the brand with great creative and product execution.”

This week, the company disclosed that the Gap Home collection will be distributed exclusively at walmart.com, and subsequently also at Walmart stores.

“Home is a natural extension of apparel and a category where storytelling drives sales,” Syngal said. She said the Gap Home is “a natural fit as we build lifestyle brands,” and that the Walmart partnership is “a capital efficient alternative to acquiring capabilities in house.” The arrangement reflects progress in the company’s objective of creating strategic partnerships to amplify “brand reach.”

Banana Republic Global saw net sales decline 29 percent versus 2019. Comparable sales were down 4 percent year-over-year and down 22 percent versus 2019. “The new team at Banana Republic is making progress laying the foundation for its transformation,” said Syngal, citing strides in realigning the pricing architecture, improving the store experience and updating brand creative, though growth has been elusive.

The company is on track to close 350 Gap and Banana Republic stores in North America by the end of 2023.

Athleta experienced “outsized digital growth while achieving record full price sales to gains in performance lifestyle products, particularly warm weather shorts, dresses, swim, and tanks,” Syngal said.  In the quarter, Athleta’s net sales were up 56 percent versus 2019. Comparable sales grew 27 percent year-over-year and 46 percent versus 2019. Athleta’s digital business was up 113 percent compared to the first quarter of 2019, while achieving “record” regular-priced sales. Product relevance and purpose-led marketing were cited as key factors in the growth. “The team made significant strides driving brand awareness during the quarter through the launch of inclusive sizing and with the announcement of a partnership with Simone Biles, the most decorated gymnast in World Championships history,” the company said. Track star Allyson Felix is also an Athleta brand ambassador. With the two athlete associations, Athleta should get lift with the Tokyo Olympics which begin in July.