Gap Inc., a portfolio of purpose-led, billion-dollar lifestyle brands including Old Navy, Gap, Banana Republic, and Athleta, and the largest specialty apparel company in the U.S., today reported financial results for its first quarter ended April 29, 2023.
“We continue to take the necessary actions to drive critical change at Gap Inc., ultimately getting us back on a path toward delivering consistent results long-term,” said Bob Martin, Executive Chairman and Interim CEO, Gap Inc. “While the macro and consumer environment remain uncertain, Q1 underscores our ability to deliver improvements to the business including share gains at Old Navy and Gap Brand, adjusted operating margin expansion, reduction in inventory, and strength in our balance sheet. The need for lasting change is permeating the organization and I want to express my gratitude to our employees for embracing a new operating model and organizational structure, a renewed focus on our customer, and for their continued belief in our incredible brands.”
“The Gap Inc. Board of Directors and I have deep appreciation for and confidence in the work that has taken hold under Bobby Martin and the Leadership Team, with results already showing progress, and more importantly, a collective focus on continued improvement still ahead. As we are engaged toward the appointment of a new Gap Inc. CEO to carry this work into the future, we look forward to the time when we will introduce this great company’s next leader – one who will bring passion, vision and an unwavering focus on the customer,” said Mayo Shattuck, Lead Independent Director, Gap Inc.
First Quarter Fiscal 2023 – Financial Results
- Net sales of $3.28 billion, down 6% compared to last year, inclusive of an estimated 1-point foreign exchange headwind and 2 percentage points of negative impact from the sale of Gap China. Net sales were in line with the company’s expectations for a mid-single digit decline in the quarter.
- Comparable sales were down 3%.
- Store sales decreased 4% compared to last year. The company ended the quarter with 3,453 store locations in over 40 countries, of which 2,601 were company operated.
- Online sales decreased 9% compared to last year and represented 37% of total net sales.
- Reported gross margin was 37.1%. Excluding $4 million in restructuring costs, adjusted gross margin of 37.2% increased 570 basis points versus last year.
- Merchandise margin increased 600 basis points versus last year, or 610 basis points on an adjusted basis, due to lower air freight expense and improved promotional activity in the quarter, partially offset by inflationary cost headwinds.
- Rent, occupancy, and depreciation (ROD) deleveraged 40 basis points versus last year primarily due to lower online sales in the quarter.
- Reported operating loss was $10 million; reported operating margin of negative 0.3%.
- Adjusted operating income was $18 million, excluding a $47 million gain related to the sale of an office building and $75 million of restructuring costs; adjusted operating margin of 0.5%.
- The effective tax rate was 10%.
- Reported net loss of $18 million; reported diluted loss per share of $0.05.
- Adjusted net income of $3 million, excluding the gain on sale and restructuring costs; adjusted diluted earnings per share of $0.01.
First Quarter Fiscal 2023 – Balance Sheet and Cash Flow Highlights
- Ended the quarter with cash and cash equivalents of $1.2 billion, an increase of 38% from the prior year.
- Net cash from operating activities was $15 million. Free cash flow, defined as net cash from operating activities less purchases of property and equipment, was negative $102 million.
- Ending inventory of $2.3 billion was down 27% compared to last year.
- Capital expenditures were $117 million.
- Paid first quarter dividend of $0.15 per share, totaling $55 million. Board of Directors approved second quarter fiscal 2023 dividend of $0.15 per share.
Additional information regarding adjusted gross margin, adjusted operating income, adjusted operating margin, adjusted net income, adjusted diluted earnings per share, and free cash flow, all of which are non-GAAP financial measures, is provided at the end of this press release along with a reconciliation of these measures from the most directly comparable GAAP financial measures for the applicable period.
First Quarter Fiscal 2023 – Global Brand Results
Old Navy:
- Net sales of $1.8 billion, down 1% compared to last year. Sales in the quarter were driven by continued strength in the women’s category offset by continued softness in the active and kid’s categories as well as continued slower demand from the lower-income consumer.
- Comparable sales were down 1%.
Gap:
- Net sales of $692 million, down 13% compared to last year. Excluding the negative impact from the sale of Gap China, the shutdown of Yeezy Gap and foreign exchange headwinds, net sales were down 1% versus last year driven by continued strength in the women’s category offset by continued softness in the active and kid’s categories as well as strategic store closures in North America.
- Comparable sales were up 1%.
Banana Republic:
- Net sales of $432 million, down 10% on top of 24% growth last year. Sales in the quarter were impacted as the brand lapped outsized growth last year driven by the shift in consumer preferences.
- Comparable sales were down 8%.
Athleta:
- Net sales of $321 million, down 11% compared to last year. Sales in the quarter were impacted by continued product acceptance challenges.
- Comparable sales were down 13%.
Fiscal 2023 Outlook
“As we look to the remainder of fiscal 2023, we believe we remain well positioned to drive continued margin expansion and improved cash flow relative to last year despite what we know continues to be an uncertain macro and consumer environment,” said Katrina O’Connell, Executive Vice President and Chief Financial Officer, Gap Inc. “We continue to believe we are taking the right steps toward positioning Gap Inc. back on its path towards sustainable, profitable growth and delivering value for our shareholders over the long term.”
The company’s outlook takes into consideration the continued uncertain consumer and macro environment.
The company is estimating second quarter net sales could decrease in the mid to high-single digit range compared to last year’s net sales of $3.86 billion. As a reminder, the sale of Gap China to Baozun Inc. closed on January 31, 2023. Second quarter 2022 net sales included approximately $60 million in sales for Gap China.
The company continues to anticipate that fiscal 2023 net sales could decrease in the low to mid-single digit range compared to last year’s net sales of $15.6 billion. As a reminder, fiscal 2022 net sales included approximately $300 million in sales for Gap China. Fiscal 2023 will include a 53rd week estimated to positively impact net sales by $150 million.
The company expects second quarter and fiscal 2023 gross margin expansion compared to the prior year. At the estimated level of sales described above, the company is planning adjusted SG&A of approximately $1.3 billion in the second quarter and continues to anticipate approximately $5.2 billion for fiscal 2023.
The company now expects fiscal 2023 capital expenditures in the range of $500 million to $525 million, compared to its prior range of $500 million to $550 million, reflecting lower capital project investments and fewer Old Navy and Athleta store openings than previously contemplated.
Webcast and Conference Call Information
Cammeron McLaughlin, Head of Investor Relations at Gap Inc., will host a conference call to review the company’s first quarter fiscal 2023 results beginning at approximately 2:00 p.m. Pacific Time today. Ms. McLaughlin will be joined by Interim Chief Executive Officer Bob Martin and Chief Financial Officer Katrina O’Connell.
