Comparable sales rose 13%, led by 95% online
net sales increase year-over-year
18% year-over-year net sales decline driven by
COVID-19 related store closures
Acquired 3.5 million new customers through our
online channel, representing over 165% growth in new online
customer acquisition year-over-year
Ended the quarter with $2.2 billion in cash and
cash equivalents, an increase of over $1 billion versus prior
quarter
Gap Inc. (NYSE: GPS), a collection of purpose-driven lifestyle
brands including Old Navy, Gap, Banana Republic and Athleta,
reported its financial results for the second quarter of fiscal
year 2020, ending August 1. Gap Inc. is the largest specialty
apparel company and the second largest apparel e-commerce business
in the U.S.
Gap Inc. second quarter results improved meaningfully compared
to the first quarter with online sales nearly doubling
year-over-year as the company leveraged its omni capabilities
through its scaled e-commerce platform. While nearly all stores
were temporarily closed due to the COVID-19 pandemic at the start
of the second quarter, the company worked to quickly reopen stores
where permitted beginning early in the quarter using
industry-leading safety measures for customers and employees. The
company delivered positive operating income and improved its cash
balance by over $1 billion compared to the first quarter, ending
the quarter with a cash and cash equivalents balance of $2.2
billion.
“Our strong performance in the second quarter reflects the
customer response to our brands, products and experiences,
particularly as we’ve rapidly adapted to the changing environment.
We nearly doubled our e-commerce business, with approximately 50%
online penetration, demonstrating our ability to pivot to a
digitally-led culture,” said Sonia Syngal, Chief Executive Officer,
Gap Inc. “I’m confident that our purpose-driven lifestyle brands,
size and scale, and advantaged digital capabilities are helping us
win now and position us for growth in the future.”
Second Quarter Fiscal Year 2020 Results
Net sales were down 18% year-over-year, reflecting a 95%
increase in online sales, offset by a 48% decline in store sales,
which were impacted by partial closures during the quarter. During
May, Gap Inc. began reopening stores previously closed as a result
of the COVID-19 pandemic, with approximately 90% of its global
fleet open as of August 1.
Second quarter fiscal year 2020 comparable sales were up 13%,
driven by the strength of Gap Inc.’s scaled e-commerce business,
which added over 3.5 million new customers during the quarter. The
comparable sales calculation reflects online sales and comparable
sales days in stores that have reopened.
Net sales and comparable sales by brand for the second quarter
2020 compared to the second quarter 2019 were as follows:
- Old Navy Global: Net sales were down 5% reflecting an
increase in online sales of 136%, offset by a 36% decline in store
sales. Comparable sales were up 24%. Old Navy continued to
experience meaningful acceleration in its online business as strong
customer response to product was further bolstered by compelling
and relevant digital marketing investment. As customers returned to
stores, the brand’s off-mall and strip real estate locations, which
make up approximately 75% of the brand’s fleet, ramped up more
quickly than other formats and continue to be an advantage.
- Gap Global: Net sales were down 28% reflecting an
increase in online sales of 75%, offset by a 55% decline in store
sales. Comparable sales were up 12%. As the brand’s fleet
rationalization efforts continue, the brand remains focused on
maximizing online demand through relevant marketing, improved
execution and customer engagement.
- Banana Republic Global: Net sales were down 52%
reflecting an increase in online sales of 26%, offset by a 71%
decline in store sales. Comparable sales were down 27%. Banana
Republic continues to focus on taking action to adjust to consumer
preferences and improve inventory mix as the shift to casual
fashion during the stay-at-home requirements has left the brand’s
work wear assortment disadvantaged.
- Athleta: Net sales were up 6% reflecting an increase in
online sales of 74%, partially offset by a 45% decline in store
sales. Comparable sales were up 19%. The brand continues to benefit
from the highly relevant values-driven active and lifestyle space
in which it participates, further fueled by the brand’s deep
customer engagement through its powerful omni-channel model.
Gross margin was 35.1%, a decline of 3.8 percentage points
versus last year, as a result of increased shipping expense as
online sales grew and the company leveraged its stores to fulfill
strong online demand. Gross margin also reflects rent and occupancy
deleverage from the impact of lost sales due to store closures,
partially offset by lower promotional activity at Old Navy, Gap and
Athleta.
Operating expenses were $1.1 billion, a decrease of $198 million
versus last year, primarily due to a decrease in store payroll and
benefits and other store expenses resulting from store closures
during the quarter. As a percentage of net sales, operating
expenses were 32.9%, an increase of 1.1 percentage points driven by
lower net sales.
Operating income was $73 million or 2.2% of net sales.
During the quarter Gap Inc. completed the issuance of $2.25
billion of senior secured notes and redeemed $1.25 billion of
previously issued unsecured notes. As a result, the company
recorded a loss on extinguishment of debt of $58 million primarily
related to the make-whole premium and incurred $56 million of net
interest expense which reflects the higher principal and higher
interest rates associated with the new debt.
The effective tax rate was negative 51.2%, reflecting changes in
the estimated benefit associated with the enactment of the
Coronavirus Aid, Relief, and Economic Security (CARES) Act and the
impact of the company’s geographical mix of pre-tax earnings. The
year-to-date effective tax rate was 23.5%.
Diluted loss per share was $0.17.
Balance Sheet
Gap Inc. ended second quarter fiscal year 2020 with $2.2 billion
in cash and cash equivalents compared to $1.1 billion at the
beginning of the quarter. Strong cash flow in the quarter reflected
meaningful improvement in sales trends compared to the first
quarter, as well as the benefit from measures the company
implemented in the first quarter to strengthen its cash position in
response to the global pandemic. These measures included securing
new financing arrangements, realigning inventory purchases to
expected demand, reducing expenses, suspending rent payments,
extending payment terms, reducing headcount across its corporate
functions, reducing capital expenditures, deferring its previously
declared first quarter dividend, and suspending its quarterly cash
dividend and share repurchases for the remainder of the fiscal
year.
In addition to the financing mentioned above, the company also
secured a $1.868 billion asset-based revolving credit facility that
replaced its prior $500 million unsecured revolving credit
facility. As of today’s earnings release, there have been no
borrowings under the $1.868 billion facility and the company does
not expect to access the facility in fiscal 2020.
Gap Inc. ended second quarter fiscal year 2020 with $2.2 billion
in inventory, down about 4% year-over-year, reflecting the
company’s focus on aligning inventory with customer demand.
Excluding pack & hold inventory that is being held for
introduction into the marketplace in the summer of 2021, ending
inventory was down about 10%. Excluding pack & hold inventory,
the company expects inventory to be down mid-single digits for the
remainder of the fiscal year.
Gap Inc. believes it is in a solid financial position to
navigate through the ongoing pandemic and continue investing in its
business.
Gap Inc. ended the quarter with 3,814 store locations in 42
countries, of which 3,215 were company-operated. As part of its
ongoing fleet optimization efforts to further advance its long-term
strategic priority of a smaller healthier fleet, the company noted
it now expects to close over 225 Gap and Banana Republic stores
globally, net of openings, in 2020 with additional closures
expected in 2021.
Cash Flow
Year-to-date free cash flow, defined as net cash from operating
activities less purchases of property and equipment, was negative
$295 million compared with positive $259 million last year,
reflecting the impact of pandemic-related store closures offset by
strong operating cash flow in the second quarter.
Please see the reconciliation of free cash flow, a non-GAAP
financial measure, in the tables at the end of this press
release.
Year-to-date capital expenditures were $208 million compared to
$324 million last year. The company continues to expect capital
spending to be approximately $300 million for fiscal year 2020.
2020 Financial Outlook
Given the high level of uncertainty in the current environment,
the company is not providing fiscal year net sales or earnings
outlooks at this time.
“Our strong financial position, healthy cash flow generation and
our continued execution of initiatives to drive profitable growth
provide the foundation to emerge from the crisis well-positioned to
compete in a rapidly evolving marketplace,” said Katrina O’Connell,
Chief Financial Officer, Gap Inc. “Recognizing the uncertainty
ahead, we remain committed to amplifying our distinct advantages
and leveraging our scale to capture share as demand recovers.”
Webcast and Conference Call Information
Tina Romani, Senior Director of Investor Relations at Gap Inc.,
will host a summary of the company’s second quarter fiscal year
2020 results during a conference call and webcast from
approximately 2:00 p.m. to 3:00 p.m. Pacific Time today. Ms. Romani
will be joined by Chief Executive Officer Sonia Syngal and Chief
Financial Officer Katrina O’Connell.
The conference call can be accessed by calling 1-855-5000-GPS or
1-855-500-0477 (participant passcode: 9329686). International
callers may dial 1-323-794-2078. The webcast can be accessed at
investors.gapinc.com.
Forward-Looking Statements
This press release and related conference call and webcast
contain forward-looking statements within the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995.
All statements other than those that are purely historical are
forward-looking statements. Words such as “expect,” “anticipate,”
“believe,” “estimate,” “intend,” “plan,” “project,” and similar
expressions also identify forward-looking statements.
Forward-looking statements include statements regarding the
following: the expectation that our digital capabilities will
position us for growth; the impact of off-mall, strip real estate,
including traffic; continued rationalization of our store fleet,
including a smaller, healthier fleet, particularly as it relates to
Gap brand and Banana Republic specialty fleets; benefits from
capital and expense actions; the expectation that we will not
access our revolving credit facility in fiscal year 2020; inventory
levels at the end of the second quarter and through the rest of
fiscal year 2020; the benefit of holding select summer inventory
until next year’s selling season; the sufficiency of our financial
position to navigate the COVID-19 pandemic and invest in our
business; our plan to close certain Gap and Banana Republic stores
globally in 2020 and 2021; capital expenditures for fiscal year
2020; and the expectation that we are well positioned to gain
market share from our competitors.
Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause the
company’s actual results to differ materially from those in the
forward-looking statements. These factors include, without
limitation, the following risks, any of which could have an adverse
effect on the company’s financial condition, results of operations,
and reputation: the risk that additional information may arise
during the company’s close process or as a result of subsequent
events that would require the company to make adjustments to its
financial information; the overall global economic environment and
risks associated with the COVID-19 pandemic; the risk that we or
our franchisees will be unsuccessful in gauging apparel trends and
changing consumer preferences; the highly competitive nature of our
business in the United States and internationally; the risk that
changes in global economic conditions or consumer spending patterns
could adversely impact our results of operations; engaging in or
seeking to engage in strategic transactions that are subject to
various risks and uncertainties; the risk that failure to maintain,
enhance and protect our brand image could have an adverse effect on
our results of operations; the risk that the failure to manage key
executive succession and retention and to continue to attract
qualified personnel could have an adverse impact on our results of
operations; the risk that our investments in customer, online, and
omni-channel shopping initiatives may not deliver the results we
anticipate; the risk that if we are unable to manage our inventory
effectively, our gross margins will be adversely affected; the
risks to our business, including our costs and supply chain,
associated with global sourcing and manufacturing; the risk that we
are subject to data or other security breaches that may result in
increased costs, violations of law, significant legal and financial
exposure, and a loss of confidence in our security measures, which
could have an adverse effect on our results of operations and our
reputation; the risk that a failure of, or updates or changes to,
our information technology systems may disrupt our operations; the
risks to our efforts to expand internationally, including our
ability to operate in regions where we have less experience; the
risk that we or our franchisees will be unsuccessful in
identifying, negotiating, and securing new store locations and
renewing, modifying, or terminating leases for existing store
locations effectively; the risks to our reputation or operations
associated with importing merchandise from foreign countries,
including failure of our vendors to adhere to our Code of Vendor
Conduct; the risk that our franchisees’ operation of franchise
stores is not directly within our control and could impair the
value of our brands; the risk that trade matters could increase the
cost or reduce the supply of apparel available to us and adversely
affect our business, financial condition, and results of
operations; the risk that foreign currency exchange rate
fluctuations could adversely impact our financial results; the risk
that comparable sales and margins will experience fluctuations; the
risk that changes in our credit profile or deterioration in market
conditions may limit our access to the capital markets and
adversely impact our financial position or our business
initiatives; the risk that changes in the regulatory or
administrative landscape could adversely affect our financial
condition and results of operations; the risk that natural
disasters, public health crises (similar to and including the
ongoing COVID-19 pandemic), political crises, negative global
climate patterns, or other catastrophic events could adversely
affect our operations and financial results, or those of our
franchisees or vendors; the risk that reductions in income and cash
flow from our credit card arrangement related to our private label
and co-branded credit cards could adversely affect our operating
results and cash flows; the risk that the adoption of new
accounting pronouncements will impact future results; the risk that
we do not repurchase some or all of the shares we anticipate
purchasing pursuant to our repurchase program; and the risk that we
will not be successful in defending various proceedings, lawsuits,
disputes, and claims.
Additional information regarding factors that could cause
results to differ can be found in the company’s Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on June
9, 2020, as well as the company’s subsequent filings with the
Securities and Exchange Commission.
These forward-looking statements are based on information as of
August 27, 2020. The company assumes no obligation to publicly
update or revise its forward-looking statements even if experience
or future changes make it clear that any projected results
expressed or implied therein will not be realized.
About Gap Inc.
Gap Inc. is a leading global retailer offering clothing,
accessories, and personal care products for men, women, and
children under the Old Navy, Gap, Banana Republic, Athleta,
Intermix, Janie and Jack, and Hill City brands. Fiscal year 2019
net sales were $16.4 billion. Gap Inc. products are available for
purchase worldwide through company-operated stores, franchise
stores, and e-commerce sites. For more information, please visit
www.gapinc.com.
The Gap, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED ($ in millions) August 1,2020
August 3,2019 ASSETS Current assets: Cash and cash
equivalents
$
2,188
$
1,177
Short-term investments
25
294
Merchandise inventory
2,242
2,326
Other current assets
882
770
Total current assets
5,337
4,567
Property and equipment, net
2,895
3,141
Operating lease assets
4,689
5,807
Other long-term assets
795
528
Total assets
$
13,716
$
14,043
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable
$
1,629
$
1,246
Accrued expenses and other current liabilities
1,124
908
Current portion of operating lease liabilities
856
946
Income taxes payable
40
34
Total current liabilities
3,649
3,134
Long-term liabilities: Long-term debt
2,212
1,249
Long-term operating lease liabilities
5,179
5,644
Lease incentives and other long-term liabilities
423
391
Total long-term liabilities
7,814
7,284
Total stockholders' equity
2,253
3,625
Total liabilities and stockholders' equity
$
13,716
$
14,043
The Gap, Inc. CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS UNAUDITED 13 Weeks Ended 26 Weeks
Ended ($ and shares in millions except per share
amounts) August 1,2020 August 3,2019 August
1,2020 August 3,2019 Net sales
$
3,275
$
4,005
$
5,382
$
7,711
Cost of goods sold and occupancy expenses
2,126
2,449
3,965
4,811
Gross profit
1,149
1,556
1,417
2,900
Operating expenses
1,076
1,274
2,588
2,302
Operating income (loss)
73
282
(1,171
)
598
Loss on extinguishment of debt
58
-
58
-
Interest, net
56
11
71
25
Income (loss) before income taxes
(41
)
271
(1,300
)
573
Income taxes
21
103
(306
)
178
Net income (loss)
$
(62
)
$
168
$
(994
)
$
395
Weighted-average number of shares - basic
374
378
373
378
Weighted-average number of shares - diluted
374
379
373
380
Earnings (loss) per share - basic
$
(0.17
)
$
0.44
$
(2.66
)
$
1.04
Earnings (loss) per share - diluted
$
(0.17
)
$
0.44
$
(2.66
)
$
1.04
The Gap, Inc. CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS UNAUDITED
26 Weeks Ended
($ in millions)
August 1, 2020 (a)
August 3, 2019 (a)
Cash flows from operating activities: Net income (loss)
$
(994
)
$
395
Depreciation and amortization
256
277
Impairment of operating lease assets
361
-
Impairment of store assets
127
3
Loss on extinguishment of debt
58
-
Gain on sale of building
-
(191
)
Change in merchandise inventory
(91
)
(166
)
Other, net
196
265
Net cash provided by (used for) operating activities
(87
)
583
Cash flows from investing activities: Purchases of property
and equipment
(208
)
(324
)
Purchase of building
-
(343
)
Proceeds from sale of building
-
220
Purchases of short-term investments
(59
)
(150
)
Proceeds from sales and maturities of short-term investments
325
146
Purchase of Janie and Jack
-
(69
)
Other
2
-
Net cash provided by (used for) investing activities
60
(520
)
Cash flows from financing activities: Proceeds from
revolving credit facility
500
-
Payments for revolving credit facility
(500
)
-
Proceeds from issuance of long-term debt
2,250
-
Payments to extinguish debt
(1,307
)
-
Payments for debt issuance costs
(61
)
-
Proceeds from issuances under share-based compensation plans
12
17
Withholding tax payments related to vesting of stock units
(8
)
(20
)
Repurchases of common stock
-
(100
)
Cash dividends paid
-
(183
)
Net cash provided by (used for) financing activities
886
(286
)
Effect of foreign exchange rate fluctuations on cash, cash
equivalents, and restricted cash
1
(2
)
Net increase (decrease) in cash, cash equivalents, and restricted
cash
860
(225
)
Cash, cash equivalents, and restricted cash at beginning of period
1,381
1,420
Cash, cash equivalents, and restricted cash at end of period
$
2,241
$
1,195
____________________ (a) For the twenty-six weeks
ended August 1, 2020 and August 3, 2019, total cash, cash
equivalents, and restricted cash includes $53 million and $18
million, respectively, of restricted cash recorded in other current
assets and other long-term assets on the Condensed Consolidated
Balance Sheets.
NON-GAAP FINANCIAL MEASURES UNAUDITED
FREE CASH FLOW Free cash flow is a non-GAAP
financial measure. We believe free cash flow is an important metric
because it represents a measure of how much cash a company has
available for discretionary and non-discretionary items after the
deduction of capital expenditures as we require regular capital
expenditures to build and maintain stores and purchase new
equipment to improve our business and infrastructure. We use this
metric internally, as we believe our sustained ability to generate
free cash flow is an important driver of value creation. However,
this non-GAAP financial measure is not intended to supersede or
replace our GAAP results.
26 Weeks Ended ($ in
millions) August 1,2020 August 3,2019 Net cash
provided by (used for) operating activities
$
(87
)
$
583
Less: Purchases of property and equipment (a)
(208
)
(324
)
Free cash flow
$
(295
)
$
259
____________________ (a) Excludes purchase of
building in the first quarter of fiscal 2019.
The Gap, Inc.
NET SALES RESULTS UNAUDITED The following
table details the Company’s second quarter net sales (unaudited):
($ in millions) Old Navy Global Gap
Global BananaRepublic Global Other (3)
Total 13 Weeks Ended August 1, 2020 U.S. (1)
$
1,726
$
473
$
236
$
328
$
2,763
Canada
145
63
27
-
235
Europe
-
70
2
-
72
Asia
2
158
14
-
174
Other regions
8
19
4
-
31
Total
$
1,881
$
783
$
283
$
328
$
3,275
($ in millions) Old Navy Global Gap
Global BananaRepublic Global (2) Other (4)
Total 13 Weeks Ended August 3, 2019 U.S. (1)
$
1,794
$
645
$
530
$
331
$
3,300
Canada
148
85
53
-
286
Europe
-
131
4
-
135
Asia
11
201
23
-
235
Other regions
19
24
6
-
49
Total
$
1,972
$
1,086
$
616
$
331
$
4,005
____________________ (1) U.S. includes the United
States, Puerto Rico, and Guam. (2) Banana Republic Global
fiscal year 2019 net sales include Janie and Jack brand. (3)
Primarily consists of net sales for the Athleta, Intermix, and Hill
City brands. Beginning in fiscal year 2020, Janie and Jack net
sales are also included. Net sales for Athleta for the thirteen
weeks ended August 1, 2020 were $267 million. (4) Primarily
consists of net sales for the Athleta, Intermix, and Hill City
brands as well as a portion of income related to our credit card
agreement. Net sales for Athleta for the thirteen weeks ended
August 3, 2019 were $252 million.
The Gap, Inc. REAL
ESTATE Store count, openings, closings, and square
footage for our stores are as follows:
February 1,
2020 26 Weeks Ended August 1, 2020 August 1, 2020
Store Locations Store Locations Opened Store
Locations Closed (1) Store Locations Square Feet
(millions) Old Navy North America
1,207
14
8
1,213
19.5
Old Navy Asia
17
-
17
-
-
Gap North America
675
2
66
611
6.5
Gap Asia
358
10
10
358
3.2
Gap Europe
137
3
11
129
1.1
Banana Republic North America
541
2
45
498
4.2
Banana Republic Asia
48
4
5
47
0.2
Athleta North America
190
8
2
196
0.8
Intermix North America
33
-
1
32
0.1
Janie and Jack North America
139
-
8
131
0.2
Company-operated stores total
3,345
43
173
3,215
35.8
Franchise
574
35
10
599
N/A
Total
3,919
78
183
3,814
35.8
____________________ (1) This represents stores
permanently closed, not stores temporarily closed as a result of
COVID-19.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20200827005650/en/
Investor Relations Contact: Tina Romani (415) 427-5264
Investor_relations@gap.com
Media Relations Contact: Sandy Goldberg (415) 427-3022
Press@gap.com
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