Sonia Syngal

Gap Inc., like other retailers selling nonessentials, suffered dearly in the first quarter due to COVID-19, reporting a loss of $932 million 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.

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 not surprisingly 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.

During a conference call, Gap executives did not address the Simon suit, but they outlined the strategy with landlords.

Chief financial officer and executive vice president Katrina O’Connell said, “We have some stores that need to be renegotiated from a rent structure standpoint, lease terms, and co-tenancies. We are seeking, some rent relief. We haven’t put a number out there. We are deep in those negotiations now…We have accrued the full amount of rent expense for accounting purchases, even though cash payments were not made. We may require a cash outlay for rent that has been suspended.” Rent concessions are being sought on Gap and Banana Republic stores.
“We are pleased with the progress we are making with a number of landlords,” added Syngal.

Even with the disruptions from the pandemic in the first quarter, in some ways the story was the same as it has been for several years at the San Francisco-based Gap Inc. Old Navy and Athleta continue to lead the performance, while Gap and Banana Republic continue to lag. “We must be resolute about delivering brand clarity, quality and consistent execution,” stated Syngal. “Frankly we have not done this well for Gap and Banana Republic.”

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.

“Narrower and deeper assortment” are planned at Gap. And as reported, Gap signed a multiyear deal with IMG to extend the offerings of its Gap, Banana Republic and Janie and Jack brands to products and categories currently not sold but would be logical extensions of the existing assortments. Bedding, home textiles, home decor, furniture and baby equipment such as strollers and high chairs are among the products being considered.

Banana Republic’s net 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-athome merchandise, but shifts in the mix are in the works. Workwear, suiting and dresses were underperformed.

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 omni-channel model,” Gap Inc. said.

Due to the health crisis, civil unrest and uncertain economic climate, Gap Inc. did not provide forecasts for the year, though O’Connell did say, “We are modeling and preparing for another potential COVID wave this year.”

According to O’Connell, the promotional environment in the second quarter will “likely be largely the same” as the first quarter. However, operating costs of stores will be higher this year due to health measures that need to be taken and additional manpower required to monitor traffic at the front doors and fitting rooms.

Syngal began her comments during the conference call by addressing the civil unrest around the country and issues revolving around racism in the aftermath of last week’s killing of George Floyd by Minneapolis police. “As a company we have an opportunity to create a world that is more inclusive and brands that serve as a force for good..In a time of crisis, brands matter. Customers want to spend their money on brands they trust.” She did note that 20 stores sustained extensive damage during the looting that occurred while protests were being held.

During a conference call, Syngal indicated:
* 2,100 stores are operating as “mini fulfillment hubs.”
* The Ohio distribution center was expanded, rigged with robotics, and has the highest capacity of all the retailer’s DCs.
* The company planned for 800 stores to open and managed to reopen 1,500.
* Seventy percent of Gap Inc. stores are in strip and outlet centers and off-mall locations, where executives expect customers to gravitate to due to health concerns related to COVID-19.
* The company has a new pack-and-hold strategy. It’s holding summer inventory for a year before offering it to customers.
* Store openings are being considered for Athleta and Old Navy, while Gap and Banana continue to downsize.
* The cash burn is expected to slow in the second quarter as sales trends should improve as the year progresses.