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Supply chain disruptions impact Gap's Q3

By Prachi Singh

Nov 24, 2021

Management

Image: Gap media center

Gap Inc. reported a third quarter fiscal year 2021 diluted loss per share of 40 cents. The company said, third quarter net sales of 3.9 billion dollars were down 1 percent compared to 2019 with supply chain disruption driving an estimated 8 percentage point negative impact due to constrained inventory.

The company noted that while supply chain constraints continue, it is leveraging increased air freight and port diversification to navigate ongoing delivery challenges for holiday.

“While we entered the third quarter with growing momentum, acute supply chain headwinds affected our ability to fully meet strong customer demand. Still, we made an intentional investment in building enduring customer loyalty with accelerated use of air freight to serve them this holiday, choosing long-term growth opportunity over near-term impact to profitability,” said Sonia Syngal, CEO, Gap Inc.in a release

Gap’s Q3 comparable sales increase 5 percent against 2019

The company’s online sales grew 48 percent compared to the third quarter of 2019 and represented 38 percent of the total business. Third quarter comparable sales were up 5 percent versus 2019.

Net sales at Old Navy were up 8 percent versus 2019. Comparable sales were down 9 percent year-over-year and increased 6 percent versus 2019. Following the launch of Bodequality, Old Navy’s extended-size customer file has doubled since last quarter, with 15 percent of extended-size customers being new to the brand.

Gap brand net sales declined 10 percent versus 2019, with permanent store closures resulting in an estimated 18 percent net sales decline. Global comparable sales increased 7 percent year-over-year and increased 3 percent versus 2019. North America two-year comparable sales were positive for the third consecutive quarter, up 13 percent versus 2019, with net sales 1 percent below 2019 levels despite nearly 190 store closures in the region since the third quarter of 2019.

Banana Republic net sales declined 18 percent versus 2019, with permanent store closures resulting in an estimated 10 percent sales decline. Comparable sales increased 28 percent year-over-year and decreased 10 percent versus 2019. Banana Republic was able to expand product margins in the quarter compared to both last year and 2019 through lower discount rates and higher selling prices.

Athleta net sales were up 48 percent versus 2019 with comparable sales increase of 2 percent year-over-year and 41 percent versus 2019. During the quarter, Athleta expanded its footprint by launching its Canadian online business at the end of August and opening its first company-operated Canadian store in Vancouver at the end of September, followed by its second store which opened in Toronto last week.

Operational highlights of Gap’s financial results

Compared to the third quarter of fiscal 2019 reported gross margin of 42.1 percent increased 310 basis points versus 2019. Excluding a benefit related to transitioning the company’s European business to a partnership model, adjusted gross margin was 41.9 percent, an increase of 290 basis points.

Operating margin for the quarter was 3.9 percent on a reported basis, while adjusted operating margin of 4.3 percent decreased 320 basis points compared to 2019.

The company paid a dividend of 12 cents per share during the third quarter of fiscal year 2021. In addition, on November 10, 2021, the company announced that its board of directors authorized a fourth quarter dividend of 12 cents per share.

The company ended the third quarter with 3,459 store locations in over 40 countries, of which 2,873 were company operated.

Gap expects full year earnings per share in the range of 45 to 60 cents

The company now expects its reported full-year diluted earnings per share to be in the range of 45 cents to 60 cents and adjusted diluted earnings per share in the range of 1.25 dollars to 1.40 dollars.

The company now expects full-year revenue growth to be about twenty percent versus fiscal year 2020. Gap expects its reported operating margin to be about 4.5 percent, with adjusted operating margin expected to be about 5 percent, on track to achieving a 10 percent operating margin by the end of 2023.

The company continues to expect to open about 30-40 Old Navy and 20-30 Athleta stores in 2021, as well as close approximately 75 Gap and Banana Republic stores in North America.