Year-over-year net sales were flat, reflecting
a meaningful improvement versus the prior quarter, including a 5%
rise in comparable sales, and a 61% increase in online sales
Acquired 3.4 million new customers through our
online channel, representing over 145% growth in new online
customer acquisition year-over-year
Ended the quarter with $2.6 billion in cash,
cash equivalents, and short-term investments versus $1.1 billion in
the year-ago quarter
Gap Inc. (NYSE: GPS), a collection of purpose-led lifestyle
brands including Old Navy, Gap, Banana Republic and Athleta,
reported its financial results for the third quarter of fiscal year
2020, ending October 31. Gap Inc. is the largest specialty apparel
company and the second largest apparel e-commerce business in the
U.S.
Gap Inc. third quarter results reflected flat sales versus last
year, supported by 5% growth in comparable sales which was driven
by a 61% increase in online sales. Net sales were impacted by the
company’s ongoing strategy to close unprofitable stores. Gross
margin increased 160 basis points versus last year, to 40.6%.
For the quarter, Gap Inc. delivered $0.25 earnings per diluted
share, reflecting gross margin improvement versus the prior year,
partially offset by higher operating expenses, including a
significant increase in marketing support across all brands.
“Our third quarter results reflect our Power Plan 2023 in action
— specifically the strength of our online business, which comprised
40% of sales, and our commitment to meeting the shopping
preferences of our customers through our leading omni platform,”
said Sonia Syngal, Chief Executive Officer, Gap Inc. “With our
teams focused on sales growth and returning to profitability, we’ve
made investments in demand generation that are driving engagement,
particularly in this dislocated market as customers are looking to
trusted brands to provide easy and safe shopping options.”
Third Quarter Fiscal Year 2020 Results
Net sales were flat year-over-year, reflecting a 61% increase in
online sales, offset by a 20% decline in store sales. Notably, 40%
of the company’s sales were online in the third quarter. As noted
during the company’s Investor Meeting, held in October 2020, the
company aspires to achieve 50% of its sales from online by the end
of 2023.
Third quarter fiscal year 2020 comparable sales were up 5%,
driven by the strength of Gap Inc.’s scaled e-commerce business,
which added over 3.4 million new customers during the quarter. The
comparable sales calculation reflects online sales and comparable
sales days in stores that were open.
Net sales and comparable sales by brand for the third quarter
2020 compared to the third quarter 2019 were as follows:
- Old Navy Global: Net sales increased 15%, with
comparable sales up 17%. 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. During the quarter, active
offerings grew over 55%. Notably, Old Navy’s U.S. Kids & Baby
apparel business added meaningful market share to become the #1
brand in that segment.1 Additionally, the brand’s off-mall and
strip real estate locations, which make up approximately 75% of the
brand’s fleet, continue to be an advantage, supporting not only
in-store sales but customers’ omni purchases, through curbside and
buy-online-pickup-in-store (BOPIS).
- Gap Global: Net sales were down 14% and comparable sales
were down 5%. This reflects a reduced store fleet and lower traffic
trends partially offset by strong online performance. The brand
remains focused on maximizing online demand through relevant
marketing, improved execution and customer engagement. In
particular, the brand’s Fall marketing campaigns “Stand United” and
“Be the Future” generated positive customer response.
- Banana Republic Global: Net sales were down 34%, a
slight improvement versus the second quarter. Comparable sales were
down 30%. As previously discussed, Banana Republic continues to
focus on adjusting to consumer preferences and improving inventory
mix by shifting away from the brand’s traditional work wear
assortment and into casual fashion during the current stay-at-home
environment.
- Athleta: Net sales were up 35%. Comparable sales were
the highest in the brand’s history - up 37% - and online
contribution remained above 50% in the quarter. Athleta continues
to benefit from its participation in the highly relevant
values-driven active and lifestyle space, strong returns from
increased digital marketing investments, and a focused product
strategy, which is driving a healthy regular price business. While
performance was strong across the brand, masks continued to attract
new customers, providing the opportunity to build a relationship
across other product offerings.
Gross margin was 40.6%, a 160 basis point improvement versus
last year. This improvement is consistent with the strategic focus
outlined in last month’s Power Plan 2023 discussion of opening
highly-profitable Old Navy and Athleta stores, while also closing
select unprofitable Gap and Banana Republic stores, yielding
significant rent and occupancy savings. In addition, a lower level
of promotions contributed to higher product margins in the quarter.
The benefits of lower rent and occupancy and higher product margin
were partially offset by higher shipping expenses associated with
the company’s growth in online sales.
Operating expenses were 36.2% of sales, an increase of 270 basis
points versus last year, reflecting over 175 basis points in higher
marketing investment across all brands and approximately 140 basis
points in spending to support health and safety measures in stores.
Operating expenses were also impacted by approximately 120 basis
points in costs associated with store closures that were mostly
offset by rent and occupancy benefits reflected in gross margin.
These increases were partially offset by approximately 200 basis
points in one-time costs in the year-ago quarter primarily related
to the company’s previously planned separation of Old Navy.
Operating income was $175 million or 4.4% of net sales.
The effective tax rate was 21.5%, primarily 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 23.7%.
Diluted earnings per share for the third quarter was $0.25.
Balance Sheet
Gap Inc. ended third quarter fiscal year 2020 with $2.6 billion
in cash, cash equivalents, and short-term investments, compared to
$1.1 billion at the end of the third quarter in fiscal year 2019,
providing ample liquidity to support the company’s long-term growth
strategy.
As of the end of its third quarter fiscal year 2020, Gap Inc.
inventory was up 1% versus the year-ago quarter. Excluding pack
& hold inventory that is being held for introduction into the
marketplace in 2021, ending inventory was down about 7%, reflecting
the company’s focus on working capital management.
Gap Inc. ended the quarter with 3,785 store locations in 43
countries, of which 3,178 were company-operated. This compares to
3,396 company-operated stores in the third quarter last year. As
part of ongoing fleet optimization efforts supporting its long-term
strategic priority of a smaller healthier fleet, the company
reiterates its intention to close approximately 225 Gap and Banana
Republic stores globally, net of openings, in 2020.
Cash Flow
Year-to-date free cash flow, defined as net cash from operating
activities less purchases of property and equipment, was $111
million compared with $5 million last year, reflecting strong
operating cash flow in the second and third quarters, following the
impact of pandemic-related store closures earlier in the year, as
well as a lower level of capital expenditures versus the prior
year.
Please see the reconciliation of free cash flow, a non-GAAP
financial measure, in the tables at the end of this press
release.
Strong cash flow in the quarter reflected gross margin
improvement, and focused working capital management, particularly
as the company focused on aligning inventory relative to customer
demand, as well as prudent capital expenditure management.
Year-to-date capital expenditures were $288 million compared to
$523 million last year. The company now anticipates capital
spending to be approximately $375 million for fiscal year 2020, an
increase versus the prior forecast of approximately $300 million,
as the company invests in investments to drive online growth,
particularly in digital, technology, and capacity.
2020 Financial Outlook
Recognizing the continued high level of uncertainty in the
marketplace, the company is not providing a fiscal year earnings
outlook. The widely-noted recent rise in COVID-19 cases remains a
concern, which may impact store traffic. However, with rapidly
growing online sales contribution, at over 40% of company sales in
the quarter, and the opportunity for market share gains, supported
by the significant investment in marketing, the company remains
optimistic for the fourth quarter.
Behind the continued investment in digital capabilities,
including the third quarter launch of its loyalty program, the
company believes it is well-positioned heading into the holiday
shopping season.
General assumptions for the fourth quarter include:
- Net sales being equal to or slightly higher than last year
- Gross margin rate being equal to last year, reflecting
continued benefits of store closures largely offset by higher
shipping expenses
- Operating expenses being between 33% to 34% of company sales,
reflecting the company’s continued investment in brand marketing,
behind the opportunity to capture market share, as well as the
continued cost of in-store health & safety measures on behalf
of our customers and employees.
“We’re really pleased to see key elements of our Power Plan 2023
strategy driving results in the third quarter, reflected in
improving sales and gross margin trends, following the
COVID-19-related store closures earlier in the year,” said Katrina
O’Connell, Chief Financial Officer, Gap Inc. “Importantly, our
strong cash flow continues to provide us ample liquidity to invest
in marketing support behind our brands, as well as digital
capabilities to drive our rapidly growing online business.”
Webcast and Conference Call Information
Steve Austenfeld, Head of Investor Relations at Gap Inc., will
host a summary of the company’s third 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. Mr. Austenfeld 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: 9501186). 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: our ability to achieve 50% of sales from online by the
end of 2023; our ability to open highly-profitable Old Navy and
Athleta stores, close select unprofitable Gap and Banana Republic
stores and achieve significant rent and occupancy savings; our
ability to achieve our goal of a smaller healthier fleet of Gap and
Banana Republic stores; our anticipated capital spending in fiscal
year 2020; our expectation that we will gain market share in the
fourth quarter of fiscal year 2020; and assumptions regarding our
net sales, gross margin and operating expense for the fourth
quarter of fiscal year 2020.
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
November 24, 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 $16.4 billion. Gap Inc. products are available for
purchase worldwide through company-operated stores, franchise
stores, and e-commerce sites. For more information, please visit
www.gapinc.com.
1 Source: The NPD Group / Consumer Tracking Service / U.S.
Apparel, Dollar Share, Wearer Segment: Boys, Girls, Male Infant
Toddler, Female Infant Toddler, 3 Months Ending October 2020
The Gap, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED ($ in millions) October
31,2020 November 2,2019 ASSETS Current assets: Cash and
cash equivalents
$
2,471
$
788
Short-term investments
178
294
Merchandise inventory
2,747
2,720
Other current assets
966
770
Total current assets
6,362
4,572
Property and equipment, net
2,846
3,225
Operating lease assets
4,460
5,796
Other long-term assets
705
525
Total assets
$
14,373
$
14,118
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable
$
2,284
$
1,241
Accrued expenses and other current liabilities
1,283
974
Current portion of operating lease liabilities
823
934
Income taxes payable
41
43
Total current liabilities
4,431
3,192
Long-term liabilities: Long-term debt
2,214
1,249
Long-term operating lease liabilities
4,899
5,650
Lease incentives and other long-term liabilities
458
393
Total long-term liabilities
7,571
7,292
Total stockholders' equity
2,371
3,634
Total liabilities and stockholders' equity
$
14,373
$
14,118
The Gap, Inc. CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS UNAUDITED 13 Weeks Ended 39
Weeks Ended ($ and shares in millions except per share
amounts) October 31,2020 November 2,2019
October 31,2020 November 2,2019 Net sales
$
3,994
$
3,998
$
9,376
$
11,709
Cost of goods sold and occupancy expenses
2,374
2,439
6,339
7,250
Gross profit
1,620
1,559
3,037
4,459
Operating expenses
1,445
1,338
4,033
3,640
Operating income (loss)
175
221
(996
)
819
Loss on extinguishment of debt
-
-
58
-
Interest, net
54
12
125
37
Income (loss) before income taxes
121
209
(1,179
)
782
Income taxes
26
69
(280
)
247
Net income (loss)
$
95
$
140
$
(899
)
$
535
Weighted-average number of shares - basic
374
375
373
377
Weighted-average number of shares - diluted
380
376
373
379
Earnings (loss) per share - basic
$
0.25
$
0.37
$
(2.41
)
$
1.42
Earnings (loss) per share - diluted
$
0.25
$
0.37
$
(2.41
)
$
1.41
The Gap, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS UNAUDITED 39 Weeks Ended ($ in
millions) October 31,2020 (a) November 2,2019 (a)
Cash flows from operating activities: Net income (loss)
$
(899
)
$
535
Depreciation and amortization
381
417
Impairment of operating lease assets
361
1
Impairment of store assets
127
9
Loss on extinguishment of debt
58
-
Gain on sale of building
-
(191
)
Change in merchandise inventory
(590
)
(559
)
Change in accounts payable
1,120
129
Other, net
(159
)
187
Net cash provided by operating activities
399
528
Cash flows from investing activities: Purchases of property
and equipment
(288
)
(523
)
Purchase of building
-
(343
)
Proceeds from sale of building
-
220
Purchases of short-term investments
(237
)
(235
)
Proceeds from sales and maturities of short-term investments
348
231
Purchase of Janie and Jack
-
(69
)
Other
2
-
Net cash used for investing activities
(175
)
(719
)
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
16
22
Withholding tax payments related to vesting of stock units
(8
)
(21
)
Repurchases of common stock
-
(150
)
Cash dividends paid
-
(274
)
Net cash provided by (used for) financing activities
890
(423
)
Effect of foreign exchange rate fluctuations on cash, cash
equivalents, and restricted cash
4
-
Net increase (decrease) in cash, cash equivalents, and restricted
cash
1,118
(614
)
Cash, cash equivalents, and restricted cash at beginning of period
1,381
1,420
Cash, cash equivalents, and restricted cash at end of period
$
2,499
$
806
____________________ (a) For the thirty-nine weeks
ended October 31, 2020 and November 2, 2019, total cash, cash
equivalents, and restricted cash includes $28 million and $18
million, respectively, of restricted cash recorded in other current
assets and other long-term assets on the Condensed Consolidated
Balance Sheets.
The Gap, Inc. NON-GAAP FINANCIAL
MEASURES UNAUDITED FREE CASH FLOW
Free cash flow is a non-GAAP financial measure. We believe free
cash flow is an important metric because it represents a measure of
how much cash a company has available for discretionary and
non-discretionary items after the deduction of capital expenditures
as we require regular capital expenditures to build and maintain
stores and purchase new equipment to improve our business and
infrastructure. We use this metric internally, as we believe our
sustained ability to generate free cash flow is an important driver
of value creation. However, this non-GAAP financial measure is not
intended to supersede or replace our GAAP results.
39
Weeks Ended ($ in millions) October 31,2020
November 2,2019 Net cash provided by operating activities
$
399
$
528
Less: Purchases of property and equipment (a)
(288
)
(523
)
Free cash flow
$
111
$
5
____________________ (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 third quarter net sales (unaudited):
($ in millions) Old NavyGlobal Gap
Global BananaRepublic Global Other (3)
Total 13 Weeks Ended October 31, 2020 U.S. (1)
$
2,034
$
611
$
323
$
370
$
3,338
Canada
193
86
39
3
321
Europe
-
115
3
-
118
Asia
1
169
18
-
188
Other regions
14
12
3
-
29
Total
$
2,242
$
993
$
386
$
373
$
3,994
($ in millions) Old NavyGlobal Gap
Global BananaRepublic Global (2) Other (4)
Total 13 Weeks Ended November 2, 2019 U.S. (1)
$
1,769
$
689
$
532
$
274
$
3,264
Canada
151
97
55
1
304
Europe
-
128
3
-
131
Asia
9
220
21
-
250
Other regions
18
24
7
-
49
Total
$
1,947
$
1,158
$
618
$
275
$
3,998
____________________ (1) U.S. includes the United
States, Puerto Rico, and Guam. (2) Banana Republic Global
fiscal year 2019 net sales include the 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 October 31, 2020 were $292 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
November 2, 2019 were $216 million.
The Gap, Inc. REAL
ESTATE Store count, openings, closings, and square
footage for our stores are as follows:
February 1,
2020 39 Weeks Ended October 31, 2020 October 31,
2020 Store Locations Store LocationsOpened
Store LocationsClosed (1) Store Locations Square
Feet(millions) Old Navy North America
1,207
30
12
1,225
19.7
Old Navy Asia
17
-
17
-
-
Gap North America
675
1
92
584
6.2
Gap Asia
358
11
19
350
3.1
Gap Europe
137
4
19
122
1.0
Banana Republic North America
541
3
55
489
4.1
Banana Republic Asia
48
5
5
48
0.2
Athleta North America
190
10
2
198
0.8
Intermix North America
33
-
1
32
0.1
Janie and Jack North America
139
-
9
130
0.3
Company-operated stores total
3,345
64
231
3,178
35.5
Franchise
574
50
17
607
N/A
Total
3,919
114
248
3,785
35.5
____________________ (1) Represents stores that have
been permanently closed, not stores temporarily closed as a result
of COVID-19.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20201124005932/en/
Investor Relations Contact: Steve Austenfeld (415)
427-1807 Investor_relations@gap.com
Media Relations Contact: Megan Foote (415) 832-1989
Press@gap.com
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