43% year-over-year sales decline driven by
COVID-19 related store closures
First quarter online sales increased 13%
year-over-year, with over 100% year-over-year online sales growth
in the month of May
55% percent of North American company-operated
fleet currently open with approximately 90% of fleet offering
convenient omni-channel order fulfillment options
Gap Inc. (NYSE: GPS), the largest specialty apparel company and
second largest apparel e-commerce business in the U.S., which
operates a portfolio of lifestyle brands, including Old Navy, Gap,
Athleta and Banana Republic, reported its financial results for the
first quarter of fiscal year 2020, ending May 2.
The Company’s first quarter results were impacted by the
temporary closure of approximately 90% of its global store fleet
starting on March 19. During the quarter, the Company enacted
several measures to strengthen its cash position, as well as
secured additional financing early in the second quarter, putting
the Company in a solid financial position to weather the pandemic.
The Company also leveraged its omni capabilities to continue to
serve customer demand online through its scaled e-commerce
platform.
“Our teams' ability to pivot quickly and lean into our strong
online business resulted in an encouraging 40% online sales growth
in April. While net sales and stores sales continued to reflect
material declines in May as a result of closures, we saw over 100%
growth in online sales during the month,” said Sonia Syngal,
President and CEO of Gap Inc. “This online momentum, enabled by new
omni-capabilities that have expanded the way customers can shop
with us, leaves us well-positioned to fuel our brands going
forward."
Syngal added, “Today we have more than 1,500 stores open in
North America, ahead of plan, and as stay at home restrictions ease
in many markets, we expect to have the vast majority of our North
American stores re-opened in June. We are optimistic that the
actions we've taken will provide a stable foundation as we navigate
near-term uncertainty and refashion Gap Inc. for long-term
growth.”
First Quarter 2020 Results
The Company noted first quarter results reflect the significant
impacts of the global pandemic, including lost sales and
corresponding merchandise margin from the temporary store closures,
a non-cash impairment charge of $484 million related to the
Company’s store assets and operating lease assets, as well as a
$235 million non-cash inventory impairment charge.
The Company’s first quarter fiscal year 2020 net sales were down
43% year-over-year, as solid momentum in the first 35 days of the
quarter was more than offset by meaningful deceleration in demand
after temporary store closures beginning in mid-March. In response,
the Company continued to serve customer demand online through its
scaled e-commerce platform, which at over $4 billion in net sales
in fiscal year 2019, represented about one quarter of the Company’s
sales for that fiscal year. The Company’s first quarter 2020 online
sales channel increased 13% compared to the first quarter fiscal
year 2019, with the Company noting continued acceleration of online
growth following the end of the quarter. The Company’s first
quarter 2020 store sales decreased 61% compared to the first
quarter fiscal 2019, driven by temporary store closures.
Additionally, the Company is not providing comparable sales
results for the quarter because the metric is not meaningful as a
result of temporary store closures in the period. Instead, the
Company has provided net sales which consists of store sales and
online sales, by brand. Store sales primarily include sales made at
Company-operated and franchise stores. Online sales primarily
include sales made through the Company’s online e-commerce
channels, including ship-from-store sales, buy online pick-up in
store sales, and order-in-store sales. First quarter net sales
details appear in the tables at the end of this press release.
Net sales by brand for the first quarter 2020 compared to the
first quarter 2019 were as follows:
- Old Navy Global: Net sales were down 42%; store sales
were down 60% with online sales up 20%. Since the onset of the
COVID-19 pandemic, Old Navy has seen a meaningful acceleration in
its digital business. The Company noted it expects the off-mall,
strip real estate that makes up approximately 75% of the fleet to
be an advantage as customers return to stores and expects traffic
in these locations to ramp up more quickly than other formats.
- Gap Global: Net sales were down 50%; store sales were
down 64% with online sales down 5%. Prior to the onset of the
pandemic, Gap brand performance continued to be pressured by
inconsistent execution of product and marketing messages. However,
the Company noted the brand did experience steady improvements in
its online performance throughout the quarter, attributable to the
Company’s strategy to migrate customers online as the brand’s fleet
rationalization efforts continue.
- Banana Republic Global: Net sales were down 47%; store
sales were down 61% with online sales down 2%. While the move to
casual fashion during the stay-at-home requirements has benefited
other brands in Gap Inc.’s portfolio, this shift left Banana
Republic disadvantaged in its product mix. As a result, Banana
Republic is taking aggressive action to adjust to consumer
preferences and improve inventory mix.
- Athleta: Net sales were down 8%; store sales were down
50% with online sales up 49%. Customer response to Athleta was
strong given the values-driven active and lifestyle space the brand
participates in as well as the brand’s deep customer engagement
through its powerful omni-channel model.
Gross margin was 12.7%, reflecting a $235 million non-cash
inventory impairment charge, rent and occupancy deleverage
associated with store closures, and increased promotional activity.
As previously disclosed, beginning in April, the Company suspended
rent payments for closed stores. While the Company remains in
active and ongoing discussions with its landlords, it noted that
first quarter gross margin reflects the cost of rent payments,
which are being accrued for accounting purposes.
Operating loss was $1.2 billion. This reflects the decline in
gross margin, as well as a non-cash impairment charge of $484
million related to the Company’s stores to reduce the carrying
amount of the store assets and the corresponding operating lease
assets to their fair values, which have dramatically declined as a
result of the pandemic. The Company noted that as part of its
ongoing specialty fleet optimization efforts, the Company has
undertaken a strategic review of its real estate portfolio to
further advance its long-term strategic priorities that include a
smaller, healthier fleet, particularly as it relates to its Gap
brand and Banana Republic specialty fleets.
The effective tax rate was 26.0% for the first quarter of fiscal
year 2020. The first quarter effective tax rate reflects benefits
associated with the enactment of the Coronavirus Aid, Relief, and
Economic Security (CARES) Act, offset by the impact of the
Company’s geographical mix of pre-tax earnings.
Diluted loss per share was $2.51.
Balance Sheet
The Company ended first quarter fiscal year 2020 with $2.2
billion in merchandise inventory, down about 1% year over year.
Excluding Pack & Hold Inventory that is being held for
introduction into the marketplace in the summer of 2021 and will be
included in the second quarter ending inventory balance, the
Company expects second quarter ending inventory to be down low to
mid-single digits.
Short-term debt increased from $0 to $500 million, reflecting
the Company’s full drawdown of its revolving credit facility.
Long-term debt remained unchanged at $1.25 billion.
Early in the second quarter, the Company issued $2.250 billion
of senior secured notes. A portion of the proceeds of the notes
will be used to redeem the previously issued $1.250 billion
unsecured notes due April 2021. The Company also repaid the
outstanding $500 million borrowed under its prior revolving credit
facility. In addition, the Company secured a $1.868 billion
asset-based revolving credit facility that replaced its existing
unsecured revolving credit facility. As of today’s earnings
release, the $1.868 billion has not been accessed and remains
available for Company use. The Company currently believes this new
capital structure provides sufficient liquidity to navigate the
COVID-19 pandemic.
The Company ended the quarter with 3,911 store locations in 42
countries, of which 3,313 were Company-operated.
Cash Flow
The Company ended first quarter fiscal year 2020 with $1.1
billion in cash, cash equivalents, and short-term investments
compared to $1.7 billion at the beginning of the quarter. Cash flow
performance was impacted by the sales decline caused by the
pandemic, partially offset by $500 million borrowed during the
quarter under the Company’s unsecured revolving credit
facility.
The Company’s first quarter cash flow was negatively impacted by
the temporary closure of its stores due to the COVID-19 pandemic,
while still incurring the vast majority of its merchandise costs,
store payroll and other operating expenses. Following North
American store closures on March 19th, the Company executed several
measures to strengthen its cash position including 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, suspending its quarterly cash dividend and share
repurchases for the remainder of the fiscal year and securing new
financing arrangements. Following these actions, the Company
believes it is in a solid financial position to navigate through
the continuing crisis and continue investing in its business.
Year-to-date free cash flow, defined as net cash from operating
activities less purchases of property and equipment, was negative
$1.1 billion compared with negative $136 million last year.
Year-to-date capital expenditures were $122 million compared to
$165 million last year. The variance in year-over-year free cash
flow was due to the change in operating cash flow, caused by the
sales decline as a result of the pandemic.
As part of the Company’s response to the COVID-19 pandemic, the
Company plans to reduce its capital expenditures for the fiscal
year by approximately 50%, and now expects capital spending to be
approximately $300 million for fiscal year 2020, which includes
about $30 million of expansion costs related to its Ohio
distribution center.
Please see the reconciliation of free cash flow, a non-GAAP
financial measure, in the tables at the end of this press
release.
2020 Financial Outlook and Second Quarter Business
Update
Beginning May 9, 2020 the Company started to reopen stores in
select states and countries in accordance with official COVID-19
recommendations provided by the World Health Organization (WHO),
Centers for Disease Control (CDC), Public Health Agency of Canada,
and local government guidelines, as well as the Retail Industry
Leaders Association (RILA) and in partnership with industry peers
to implement a number of health and safety measures that will
support its teams and customers with a safe and seamless shopping
experience.
“While we are pleased that store traffic and productivity is
exceeding expectations, particularly at Old Navy and Athleta, we
continue to plan conservatively as significant uncertainty remains
ahead.” said Katrina O’Connell, EVP and CFO Gap Inc. “We intend to
lean into our best-in-class supply chain and advantaged
omni-channel capabilities to respond as customer demand becomes
clearer.”
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.
Webcast and Conference Call Information
Tina Romani, Senior Director of Investor Relations at Gap Inc.,
will host a summary of the Company’s first 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 Sonia Syngal, Gap Inc. President and Chief Executive
Officer, and Katrina O’Connell, Gap Inc. Executive Vice President
and Chief Financial Officer.
The conference call can be accessed by calling 1-855-5000-GPS or
1-855-500-0477 (participant passcode: 1771676). International
callers may dial 1-323-794-2078. The webcast can be accessed at the
Investors section of www.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: 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; inventory levels at the end
of the second quarter and through the rest of fiscal year 2020; use
of proceeds from the $2.250 billion senior secured notes; new
capital structure providing sufficient liquidity to navigate the
COVID-19 pandemic; capital expenditures for fiscal year 2020; the
timing of store reopenings in North America; the expectation of
outsized sales growth in our online channel; ongoing discussions
and negotiations with our landlords, and impact of any resulting
resolutions; renegotiating our existing leases while simultaneously
executing store closure plans; maintaining inventory flexibility
and responsiveness while navigating uncertain retail environment;
the benefit of holding select Summer and Fall inventory until next
year’s selling season; considering new store openings, largely for
Athleta and Old Navy; impact to gross margin from lower
depreciation and amortization expense in fiscal year 2020 and on an
annualized basis; net savings from corporate headquarters
reductions in fiscal year 2020 and on an annualized basis; store
operating costs; cash burn in the second quarter; benefits from
capital and expense actions; sales trends through fiscal year 2020;
impact of store reopenings on sales, operating leverage, and
impairments, especially related to inventory; continued online
growth; gross and operating margin trends through fiscal year 2020;
fulfillment costs in the second quarter.
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, digital, 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 Current Report on
Form 8-K filed with the Securities and Exchange Commission on April
23, 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
June 4, 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 $16.4 billion. Gap Inc. products are available for
purchase in more than 90 countries worldwide through
Company-operated stores, franchise stores, and e-commerce sites.
For more information, please visit www.gapinc.com.
The Gap, Inc.
CONDENSED CONSOLIDATED BALANCE
SHEETS
UNAUDITED
($ in millions) May 2,2020 May 4,2019 ASSETS
Current assets: Cash and cash equivalents
$
1,028
$
941
Short-term investments
51
272
Merchandise inventory
2,217
2,242
Other current assets
920
757
Total current assets
4,216
4,212
Property and equipment, net
2,945
3,129
Operating lease assets
4,851
5,732
Other long-term assets
698
547
Total assets
$
12,710
$
13,620
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Revolving credit facility
$
500
$
-
Accounts payable
971
994
Accrued expenses and other current liabilities
1,051
882
Current portion of operating lease liabilities
886
929
Income taxes payable
23
26
Total current liabilities
3,431
2,831
Long-term liabilities: Long-term debt
1,250
1,249
Long-term operating lease liabilities
5,331
5,597
Lease incentives and other long-term liabilities
381
372
Total long-term liabilities
6,962
7,218
Total stockholders' equity
2,317
3,571
Total liabilities and stockholders' equity
$
12,710
$
13,620
The Gap, Inc.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
UNAUDITED
13 Weeks Ended
($ and shares in millions except per share amounts)
May 2, 2020
May 4, 2019
Net sales
$
2,107
$
3,706
Cost of goods sold and occupancy expenses
1,839
2,362
Gross profit
268
1,344
Operating expenses
1,512
1,028
Operating income (loss)
(1,244
)
316
Interest, net
15
14
Income (loss) before income taxes
(1,259
)
302
Income taxes
(327
)
75
Net income (loss)
$
(932
)
$
227
Weighted-average number of shares - basic
372
379
Weighted-average number of shares - diluted
372
381
Earnings (loss) per share - basic
$
(2.51
)
$
0.60
Earnings (loss) per share - diluted
$
(2.51
)
$
0.60
The Gap, Inc.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
UNAUDITED
13 Weeks Ended
($ in millions)
May 2, 2020 (a)
May 4, 2019 (a)
Cash flows from operating activities: Net income (loss)
$
(932
)
$
227
Depreciation and amortization
130
138
Impairment of operating lease assets
360
-
Impairment of store assets
124
-
Gain on sale of building
-
(191
)
Change in merchandise inventory
(79
)
(83
)
Change in income taxes payable, net of receivables and other
tax-related items
(322
)
36
Other, net
(221
)
(98
)
Net cash provided by (used for) operating activities
(940
)
29
Cash flows from investing activities: Purchases of property
and equipment
(122
)
(165
)
Purchase of building
-
(343
)
Proceeds from sale of building
-
220
Purchases of short-term investments
(59
)
(69
)
Proceeds from sales and maturities of short-term investments
297
86
Purchase of Janie and Jack
-
(69
)
Net cash provided by (used for) investing activities
116
(340
)
Cash flows from financing activities: Proceeds from
revolving credit facility
500
-
Proceeds from issuances under share-based compensation plans
6
10
Withholding tax payments related to vesting of stock units
(7
)
(19
)
Repurchases of common stock
-
(50
)
Cash dividends paid
-
(92
)
Net cash provided by (used for) financing activities
499
(151
)
Effect of foreign exchange rate fluctuations on cash, cash
equivalents, and restricted cash
(8
)
-
Net decrease in cash, cash equivalents, and restricted cash
(333
)
(462
)
Cash, cash equivalents, and restricted cash at beginning of period
1,381
1,420
Cash, cash equivalents, and restricted cash at end of period
$
1,048
$
958
____________________ (a) For the thirteen weeks ended May 2,
2020 and May 4, 2019, total cash, cash equivalents, and restricted
cash includes $20 million and $17 million, respectively, of
restricted cash primarily recorded in other long-term assets on the
Condensed Consolidated Balance Sheets.
The Gap, Inc.
NON-GAAP FINANCIAL MEASURES UNAUDITED FREE CASH
FLOW Free cash flow is a non-GAAP financial measure. We believe
free cash flow is an important metric because it represents a
measure of how much cash a company has available for discretionary
and non-discretionary items after the deduction of capital
expenditures as we require regular capital expenditures to build
and maintain stores and purchase new equipment to improve our
business and infrastructure. We use this metric internally, as we
believe our sustained ability to generate free cash flow is an
important driver of value creation. However, this non-GAAP
financial measure is not intended to supersede or replace our GAAP
results.
13 Weeks Ended ($ in millions) May
2,2020 May 4,2019 Net cash provided by (used for)
operating activities
$
(940
)
$
29
Less: Purchases of property and equipment (a)
(122
)
(165
)
Free cash flow
$
(1,062
)
$
(136
)
____________________ (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 first quarter net sales (unaudited):
($ in
millions) 13 Weeks Ended May 2, 2020 Old
NavyGlobal Gap Global BananaRepublic Global
Other (3) Total U.S. (1)
$
949
$
311
$
245
$
256
$
1,761
Canada
77
34
24
-
135
Europe
-
54
3
-
57
Asia
1
108
12
-
121
Other regions
11
17
5
-
33
Total
$
1,038
$
524
$
289
$
256
$
2,107
($ in millions) 13 Weeks Ended May 4, 2019
Old NavyGlobal Gap Global BananaRepublic Global
(2) Other (4) Total U.S. (1)
$
1,641
$
608
$
487
$
286
$
3,022
Canada
128
69
47
1
245
Europe
-
121
3
-
124
Asia
10
233
26
-
269
Other regions
20
21
5
-
46
Total
$
1,799
$
1,052
$
568
$
287
$
3,706
____________________ (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 beginning March 4, 2019.
(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 May 2, 2020 were $205 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 May 4, 2019 were
$223 million.
The Gap, Inc. REAL ESTATE Store count,
openings, closings, and square footage for our stores are as
follows:
February 1, 2020 13 Weeks Ended May 2, 2020
May 2, 2020 Store Locations Store
LocationsOpened Store LocationsClosed (1) Store
Locations SquareFeet(millions) Old Navy North America
1,207
4
3
1,208
19.5
Old Navy Asia
17
-
17
-
-
Gap North America
675
-
8
667
7.1
Gap Asia
358
5
2
361
3.2
Gap Europe
137
-
7
130
1.1
Banana Republic North America
541
-
2
539
4.5
Banana Republic Asia
48
1
3
46
0.2
Athleta North America
190
1
-
191
0.8
Intermix North America
33
-
-
33
0.1
Janie and Jack North America
139
-
1
138
0.2
Company-operated stores total
3,345
11
43
3,313
36.7
Franchise
574
29
5
598
N/A
Total
3,919
40
48
3,911
36.7
____________________ (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/20200604005723/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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