Announces Further Cost Structure Optimization and Efforts to Simplify Operating Model; Company Has Identified $550 Million in Annualized Savings To Date
Announces Changes to Executive Leadership Team
Gap Inc. (NYSE: GPS), 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 fourth quarter and fiscal year ended January 28, 2023. The company is also announcing several changes to its executive leadership team.
“To enter fiscal 2023 in a more competitive position, we took quick and effective action to clear excess inventory, improve assortment balance, particularly at Old Navy, and to meaningfully optimize our cost structure, resulting in $550 million in annualized savings identified to date,” said Bob Martin, Gap Inc. Executive Chairman and Interim CEO. “The Board is getting close to choosing the next CEO for Gap Inc. As a result of the work we have underway to build a stronger foundation and restore the company’s creative muscle, we are optimistic that this will provide our new leader with a quicker ramp in driving consistent, profitable growth over the long term.”
Fourth Quarter Fiscal 2022 – Financial Results
- Net sales of $4.24 billion, down 6% compared to last year, inclusive of an estimated 1-point foreign exchange headwind. Net sales were in-line with the company’s expectations for mid-single digit declines in the quarter.
- Comparable sales down 5% year-over-year.
- Store sales decreased 3% compared to last year.
- Online sales decreased 10% compared to last year and represented 41% of total net sales.
- Gross margin was 33.6%, deleveraging 10 basis points versus last year.
- Merchandise margin increased 20 basis points versus last year as higher discounting and inflationary commodity price increases were offset by lower air freight expense.
- Rent, occupancy, and depreciation (ROD) deleveraged 30 basis points versus last year primarily due to lower online sales in the quarter.
- Operating loss was $30 million; operating margin of negative 0.7%.
- The effective tax rate was negative 535%.
- Net loss of $273 million; diluted loss per share of $0.75.
Fourth Quarter Fiscal 2022 – Global Brand Results
Old Navy:
- Fourth quarter net sales of $2.2 billion were down 6% compared to last year. Comparable sales were down 7%. Performance was driven by demand softness from the lower-income consumer and in the kids and baby category partially offset by strength in the women’s category. As stated last quarter, the company believes that Old Navy pulled forward sales from the fourth quarter to October as a result of its efforts to get out earlier than typical with its first holiday promotional event, which also impacted growth in the quarter.
Gap:
- Fourth quarter net sales of $1.1 billion were down 9% compared to last year. Fourth quarter comparable sales were down 4%. North America comparable sales were down 5% in the fourth quarter. The shutdown of Yeezy Gap negatively impacted growth in North America by approximately 2 percentage points. Performance was driven by softness in the kids and baby category offset by strength in the women’s category.
Banana Republic:
- Fourth quarter net sales of $578 million were down 6% compared to last year. Fourth quarter comparable sales were down 3% driven by softness in outerwear and sweaters as well as its holiday gifting assortment. While dresses and suiting drove comp growth in the quarter, the company remains mindful of the fact that BR has been a beneficiary of the shift in consumer preferences to occasion and work-based categories as people go back to work and events post-COVID.
Athleta:
- Fourth quarter net sales of $436 million were down 1% compared to last year. Fourth quarter comparable sales were down 5% driven by continued product acceptance challenges.
Fiscal 2022 – Financial Results
- Net sales of $15.6 billion, down 6% compared to last year, inclusive of an estimated 1-point foreign exchange headwind.
- Comparable sales down 7% year-over-year.
- Store sales decreased 6% compared to last year. The company ended the year with 3,352 store locations in over 40 countries, of which 2,685 were company operated.
- Online sales decreased 7% compared to last year and represented 38% of total net sales.
- Reported gross margin was 34.3%; adjusted gross margin, excluding $111 million in impairment charges primarily related to inventory, was 35.0%, deleveraging 480 basis points versus last year.
- On a reported basis, merchandise margin declined 500 basis points versus last year; adjusted for the impairment charges, merchandise margin declined 430 basis points. Merchandise margins were negatively impacted by higher discounting and inflationary commodity price increases and partially offset by lower air freight expense.
- Rent, occupancy, and depreciation (ROD) deleveraged 50 basis points versus last year primarily due to lower comparable sales.
- Reported operating loss was $69 million; reported operating margin of negative 0.4%.
- Adjusted operating loss was $6 million, excluding impairment charges primarily related to inventory, $35 million in costs related to the transition of Old Navy Mexico, and an $83 million gain on sale related to a UK distribution center; adjusted operating margin of 0.0%.
- The effective tax rate was negative 45%.
- Reported net loss was $202 million; reported diluted loss per share of $0.55.
- Adjusted net loss was $145 million, excluding the impairment charges, costs related to the Old Navy Mexico transition, and gain on sale; adjusted diluted loss per share of $0.40.
Fiscal 2022 Balance Sheet and Cash Flow Highlights
- Ended the year with cash and cash equivalents of $1.2 billion.
- Fiscal year 2022 net cash from operating activities was $607 million. Fiscal year 2022 free cash flow, defined as net cash from operating activities less purchases of property and equipment, was negative $78 million.
- Ending inventory of $2.39 billion was down 21% year-over-year.
- Fiscal year 2022 capital expenditures were $685 million.
- Paid fourth quarter dividend of $0.15 per share, totaling $54 million. Paid dividends totaling $220 million in fiscal year 2022. Board of Directors approved first quarter fiscal 2023 dividend of $0.15 per share.
Additional information regarding adjusted gross margin, adjusted operating income (loss), adjusted operating margin, adjusted net income (loss), adjusted diluted earnings (loss) 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.
Further Actions to Optimize Operating Structure
The company announced today actions to further simplify and optimize its operating model and structure, including actions such as increasing spans of control and decreasing management layers to improve quality and speed of decision making, as well as creating a consistent organizational structure across all four brands focused on elevating its product and customer experience across all channels. These actions are estimated to result in $300 million in annualized savings, of which roughly half is expected to be realized in the back half of fiscal 2023. These actions will incur severance and other related costs which the company anticipates adjusting out of its reported operating and net income.
As a result of the company optimizing its operating structure, the role of Chief Growth Officer held by Asheesh Saksena will be eliminated effective today.
These actions are on top of the $250 million in annualized savings the company announced in the third quarter of fiscal 2022. Accordingly, over the last six months, the company has identified $550 million in annualized savings in total. The company continues to believe there are opportunities to further optimize its marketing spend and rationalize its technology investments over the next few years. Gap Inc.’s leadership has been working with external advisors on these efforts with the overall intention of optimizing and simplifying its operating structure to drive profitability and cash flow over the long term.
Other Executive Leadership Updates
The company also announced today that Mary Beth Laughton, President and CEO of Athleta is exiting the business, effective today.
“We believe Athleta has incredible potential, but it has suffered from product acceptance challenges over the past several quarters. As we look to capitalize on this potential and remain competitive amidst a dynamic landscape, we believe now is the right time to bring in a new leader who can position Athleta for long-term success,” Mr. Martin concluded. “I want to thank Mary Beth for her leadership and commitment to igniting the limitless potential of women and girls.”
While a search is underway, Gap Inc. Executive Chairman and Interim CEO, Bob Martin, will work closely with the Athleta team to lead through this transition until a new Brand President is identified.
The company also announced that Sheila Peters, Chief People Officer, will leave the company at the end of the year. As a critical part of our transformation efforts, Sheila will continue in her role enabling our people and culture through experiences and practices needed to fuel our business, while helping to identify and transition her successor.
Fiscal 2023 Outlook
“We moved swiftly in fiscal 2022 to manage the levers in our control and took action to drive immediate and long-term improvements in our business during what proved to be a challenging year. While we are better positioned as we enter fiscal 2023, we continue to take a prudent approach to planning and managing our business in light of the continued uncertain consumer and macro environment,” said Katrina O’Connell, Executive Vice President and Chief Financial Officer, Gap Inc. “We are confident that our continued actions to further optimize our operating model and cost structure are key 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 first quarter net sales could decrease in the mid-single digit range compared to last year’s net sales of $3.5 billion. The sale of Gap China to Baozun closed on January 31, 2023. First quarter 2022 net sales included approximately $60 million in sales for Gap China.
The company anticipates 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. 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 first quarter and fiscal 2023 gross margin expansion compared to the prior year. At the estimated level of sales described above, the company is planning SG&A of approximately $1.2 billion in the first quarter and approximately $5.2 billion in fiscal 2023.
The company anticipates fiscal 2023 capital expenditures in the range of $500 million to $550 million reflecting lower technology project investments as well as fewer store openings.
