Though Gap and Banana Republic have long been struggling, Sonia Syngal, chief executive officer of parent Gap Inc., says there’s “brand power” across the corporation’s portfolio and that’s fueling better results.
On Thursday, Gap Inc., largely powered by its strong Old Navy and Athleta brands, saw net income rise to $258 million in the second quarter, from a loss of $62 million in the year-ago period, which was heavily impacted by the pandemic.
Net sales of $4.2 billion were the highest second-quarter sales in more than a decade, up 29 percent from $3.3 billion during the 2020 quarter, and up 5 percent compared to 2019 pre-COVID-19 levels. Net income in the last quarter also exceeded the 2019 quarter when profits reached $168 million.
Comparable-store sales increased 12 percent versus the 2019 quarter.
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“Our talented teams delivered our highest second-quarter net sales in over a decade,” said Syngal. “Our strategy is driving growth as evidenced by continued strength at Old Navy and Athleta, Gap brand’s second consecutive quarter of positive two-year comparable sales in North America, and momentum gaining at Banana Republic. Stepped-up marketing investments, improved brand management, and technology enhancements are paying off as our brand power cuts through.”
Syngal said sales were fueled by several factors, such as nostalgic ’90s styles, the resurgence of denim, the company’s ability to react quickly to shifting trends, a 50 percent increase in marketing investments over the last several quarters, and greater full-price selling.
As a result of the momentum, the company raised its full-year outlook for sales, operating margin and earnings per share.
Along with Gap Inc., Abercrombie & Fitch also on Thursday reported positive second-quarter top- and bottom-line results, as both retailers benefited from traffic in stores continuing to rise this year after COVID-19 dried it up last year, adults buying more wear-to-work and occasion clothes as they return to offices and socialize more, and kids beginning to outfit for returning to the classroom after learning virtually for the last year and a half.
Both retailers also cited decreased discounting and higher full-price selling, partly due to lower inventories stemming from supply chain bottlenecks. They expect the decline in promoting could continue into the holiday season, which would be a big change from the years and years of frenzied levels of promotional activity.
Gap Inc. also reported that it acquired Drapr, an e-commerce start-up and online application based on technology that enables customers to quickly create 3D avatars and virtually try on clothing. “Drapr is designed to help customers find the best clothing size and fit for their personal style and body type, while helping retailers reduce unnecessary returns,” Gap said in its announcement on the acquisition.
“Fit is the number-one point of friction for customers and, through their advanced 3D technology, Drapr has shown it can help shoppers efficiently find the size and fit they need. We plan to leverage Drapr to help Gap Inc. improve the fit experience for our customers and accelerate our ongoing digital transformation,” said Sally Gilligan, chief growth transformation officer at Gap Inc., in a statement.
Strategic permanent store closures and the recent divestures of the Janie and Jack and Intermix businesses reduced net sales by approximately 8 percent versus 2019. In addition, the company estimates that COVID-19-related closures in markets outside of the U.S. resulted in approximately 2 percent of sales decline versus 2019.
Old Navy’s sales were up 21 percent versus 2019. Last week, the brand launched its “Bodequality” initiative, featuring a wider selection of women’s apparel sizes throughout the business, plus-size mannequins in every store, updated marketing materials that reflect a wider breadth of body types and sizes, and “Shrill” actress and “Saturday Night Live” cast member Aidy Bryant as the face of the campaign. In addition, Old Navy is blending plus and regular sizes from two to one area in the stores, and no longer merchandising them separately for a greater sense of inclusivity, and is doing the same online.
In America, “The average women wears size 16 to 18,” Syngal said during a conference call with investors. “Old Navy is positioned to take significant share of the $120 billion plus-size market.”
Gap brand sales declined 10 percent versus 2019, with permanent store closures resulting in an estimated 14 percent sales decline, and international COVID-19-related closures driving an estimated 1 percent decline on a two-year basis. Despite the ongoing declines, Syngal said “Gap is restoring its relevance as an iconic American brand. The North American business has reached a major inflection point with 12 percent comparable sales growth versus 2019.” She also said the quality of the product is better, discounts are lower, the website is faster and the stores are “refreshed, lighter and brighter.” She also said the “classic Gap hoodie is having a moment and that searches on gap.com for the hoodie last quarter were seven times more than they were in the second quarter a year ago.
Athleta’s net sales were up 35 percent versus 2019. Comparable-store sales grew 13 percent year-over-year and 27 percent versus 2019. Following next week’s launch of Athleta online in Canada, the brand will soon be opening stores in Toronto and Vancouver.
Sales at Banana Republic declined 15 percent versus 2019 with permanent store closures resulting in an estimated 10 percent sales decline, and international COVID-19-related closures driving an estimated 1 percent decline on a two-year basis. Nevertheless, Syngal said she is “pleased with the creative progress and momentum quarter over quarter. Dresses rebounded along with pants, shorts, and woven tops as consumers shifted back to occasion, vacation and workwear. Better execution on line and a more relevant product assortment allowed the brand to pull back on discounting.”
The company raised its reported full-year diluted EPS guidance to be in the range of $1.90 to $2.05. This outlook reflects charges incurred from the divestiture of the Janie and Jack and Intermix businesses, as well as estimated charges related to strategic changes in the company’s European business. Excluding these charges, full-year EPS on an adjusted basis are expected to be in the range of $2.10 to $2.25.
Gap said its full-year outlook reflects the impact of headwinds in its global supply chain, potential inflationary pressures and current COVID-19 environment.
The company now expects net sales growth for fiscal-year 2021 to be about 30 percent versus 2020. This outlook reflects lost revenue related to the company’s decision to change its European operating model, as well as the divestitures of Janie and Jack and Intermix.