Supply Chain Woes Cost Gap $152 Million, But Yeezy Shines

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Gap Inc. is feeling the effects of COVID-19-related supply chain headwinds.

The retailer — parent company to the Gap, Athleta, Banana Republic, Intermix and Old Navy brands — revealed quarterly earnings Tuesday after the market closed, falling short on both top and bottom lines, compared with both last year’s levels as well as pre-pandemic times, causing the company to lose $152 million for the quarter. Company shares fell more than 16 percent in after-hour trading as a result.

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“While we entered the third quarter with growing momentum, acute supply chain headwinds affected our ability to fully meet strong customer demand,” Sonia Syngal, chief executive officer of parent Gap Inc., said in a statement. “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. Current pressures have not distracted us from what matters: growing our billion-dollar brands, delighting our over 64 million customers with product and experiences that drive lifetime value and restructuring and digitizing our business with an eye on creating a better future, faster.”

For the three-month period ending Oct. 30, total company revenues fell 1 percent to $3.94 billion, down from $3.99 billion a year earlier.

By brand, revenues at the Gap declined 10 percent, compared with 2019’s levels. The company credited permanent store closures as a driver for about a fifth of those losses, while sales in North America were positive on a two-year basis. Additional growth drivers included the launch of the Yeezy Gap Hoodie during the quarter.

Syngal told analysts on Tuesday evening’s conference call that more Yeezy hoodies were sold online in a single day than any other item in Gap’s history.

“We’re unlocking a new audience for Gap,” she said.

Banana Republic’s net sales declined 18 percent, compared with 2019. Comparable sales for the brand also fell about 10 percent, compared with 2019.

Meanwhile, Athleta continues to shine thanks to the continued strength in activewear and the launch of AthletaWell, an online fitness and wellness platform, in July. Net sales at the brand were up 48 percent during the quarter, compared with 2019. Comparable sales increased 2 percent, year-over-year, or 41 percent, compared with 2019. Athleta also opened its first stores in Canada during the quarter. The brand has previously set a goal to reach $2 billion in revenues by 2023.

Net sales at Old Navy grew 8 percent, compared with 2019’s levels, while comparable sales were down 9 percent, compared with 2020. In August, Old Navy expanded its size offerings, both online and in stores, up to a size 30 with the launch of its “Bodequality” campaign.

Other tailwinds included third quarter comparable sales, up 5 percent, compared with 2019. Online sales also increased, 48 percent for the quarter, compared with 2019’s pre-pandemic third quarter.

Still, the company lost $152 million in the last three months, compared with profits of $95 million a year earlier, or $140 million in 2019’s pre-pandemic third quarter.

The firm adjusted its full-year 2021 guidance as a result. The company now expects full-year earnings-per-share to be in the range of $0.45 to $0.60 each. Gap also expects an additional $550 million to $650 million in lost sales for the year, because of ongoing supply chain restraints on inventory and higher air freight charges of around $450 million for the year.

“The supply-chain situation continues to be volatile,” Katrina O’Connell, executive vice president and chief financial officer at Gap Inc., said on the call.

“While there is still hard work ahead to navigate near-term challenges in the macro environment, the team has made tremendous progress, adapting quickly while never taking their focus off of our long-term objectives,” O’Connell added in a statement. “We have strong demand for our brands and our fleet rationalization and divestitures are progressing well and adding value. Our operating margin remains on track to hit 10 percent by 2023, in line with our plan, even as we navigate these near-term disruptions. While our mitigation efforts are driving significant transitory costs, we view these as investments in preserving market share and driving overall health and relevance for our brands.

Gap Inc. ended the quarter $1.4 billion in long-term debt, $801 million in cash and cash equivalents and 3,459 stores in more than 40 countries, of which 2,873 are company-operated.

In August, Gap acquired Drapr, an e-commerce start-up that allows shoppers to try on clothes virtually by way of 3D avatars. Then in October, the company acquired another firm, this time the New York- and Tel Aviv-based start-up Context-Based 4 Casting. The company uses AI and machine learning to increase sales and improve the customer experience with predictive analytics and demand sensing.

Shares of Gap Inc., which closed down 1.96 percent to $23.47 apiece Tuesday, are down 12.6 percent, year-over-year.

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