Online investment eats into Gap profits

FILE PHOTO: A woman shops at a Gap store as pre-Thanksgiving and Christmas holiday shopping accelerates at the King of Prussia Mall in King of Prussia, Pennsylvania, U.S. November 22, 2019. REUTERS/Mark Makela

Gap Inc fell short of Wall Street estimates for quarterly profit on Tuesday as a pivot to online sales fuelled a surge in marketing and shipping costs, sending the apparel retailer’s shares down about 11 per cent in extended trading.

The company also forecast fourth-quarter sales to be flat or slightly higher than last year, and warned of pressure on margins from elevated shipping costs, including air freight, as retailers rush to move merchandise ahead of the holiday season.

Online sales surged 61 per cent in the third quarter as stuck-at-home customers shopped for comfortable joggers, yoga pants and tops from its Old Navy and Athleta brands, helping Gap report a surprise rise in comparable sales.

But that came at a cost, with operating expenses rising about 8 per cent in the quarter.

Gap, which has launched digital campaigns such as “Stand United” and “Be the Future”, will continue to make marketing investments, CEO Sonia Syngal said.

“With this Covid environment and really a lot of the weaker players seeing significant amount of disruption, we see this as an important time to be investing in our brands for demand generation,” Syngal told analysts.

Comparable sales rose 5 per cent, trouncing the average estimate for a 0.62-per-cent fall, according to IBES data from Refinitiv.

Store sales declined 20 per cent in the third quarter, and Gap reiterated its intention to close several hundred Gap and Banana Republic stores globally, while opening profitable Old Navy and Athleta stores.

The San Francisco-based retailer reported a net income of $95 million, or 25 cents per share, for the three months ended October 31, down from a profit of $140 million, or 37 cents per share, a year earlier. Analysts had expected the company to earn 32 cents per share.

Neil Saunders, MD at GlobalData, described the results as “a good set of numbers” given the disruption caused by the pandemic and weak results for the preceding two quarters.

“Digging beneath the numbers reveals that the hero of the hour is Old Navy which has, once again, come to the rescue of the other two main laggards which make up Gap Inc. Sales at Old Navy grew by an impressive 15 per cent over the prior year, while sales at the Gap brand fell by 11 per cent and revenue at Banana Republic plunged by 39 per cent,” said Saunders.

“The dynamic behind the varying fortunes is obvious. Old Navy’s focus is on casual and comfortable clothing which is one of the few apparel categories that has held up relatively well during the pandemic. We further believe that Old Navy’s value for money stance has served it well with the family demographic which has been paying particular attention to price over the past few months.

“There is also something to be said for the aesthetic at Old Navy which has remained cheerful and upbeat at a time when consumers have been looking for relief from the bleakness of the pandemic. This can be seen in categories like masks where fun and engaging designs have helped to drive sales,” he said.

The sharp sales decline at Banana Republic is mostly a function of changing wardrobe priorities.

“As consumers are still working from home more and going out less, the smart casual vibe has taken a backseat. There has been some effort to switch to a more casual assortment, but this is not what Banana Republic is known for, so consumer traction has been relatively limited. In a way, we believe that the best Banana can do is hold its nerve and wait for things to return to some semblance of normality.”

Saunders concluded: “Overall, Gap is emerging as one of the better players during the pandemic. However, there are a lot of underlying issues for Sonia Syngal and her new team to work through.”

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