Gap (GPS) Q3 2021 earnings miss, cuts forecast

A Gap store in New York, August 2, 2020.

Scott Mlyn | CNBC

Gap Inc. shares tumbled Tuesday after the company slashed its full-year outlook, with fiscal third-quarter results falling short as Covid-related factory closures led to significant product delays in the quarter.

Its stock was recently down about 16% in extended trading on the news, having risen about 16% year to date.

“While we entered the third quarter with growing momentum, acute supply chain headwinds affected our ability to fully meet strong customer demand,” said Chief Executive Sonia Syngal in a press release.

Gap said it invested in air freight to help mitigate some of the port congestion challenges over the holidays. But that also means added expenses that will weigh on profits in the near term.

Here’s how Gap did in the three-month period ended Oct. 30 compared with what analysts were anticipating, using Refinitiv data:

  • Earnings per share: 27 cents adjusted vs. 50 cents expected
  • Revenue: $3.94 billion vs. $4.44 billion expected

Gap said it swung to a net loss of $152 million, or 40 cents per share, from net income of $95 million, or 25 cents a share, a year earlier.

Excluding items, it earned 27 cents per share, short of the 50 cents that analysts had been looking for, according to Refinitiv.

Revenue fell slightly to $3.94 billion from $3.99 billion a year earlier. That missed expectations for $4.44 billion.

Supply chain issues will persist

Chief Financial Officer Katrina O’Connell said that backlogs at U.S. ports deteriorated meaningfully into the back half of this year, resulting in as much as three continuous weeks of unanticipated delays of Gap’s fall products.

Although some of the disruption is transitory, the challenges will likely persist into early next year, she said.

Gap’s inventories were down 1% at the end of the third quarter compared with year-ago levels, and they were flat versus 2019. Gap said it expects fourth-quarter inventories to be up high-single digits year over year.

“The supply chain situation continues to be volatile,” O’Connell said. “Newly opened Vietnam factories are behind on holiday.”

Lost sales hurt Old Navy the most

Other apparel retailers including Victoria’s Secret and Abercrombie & Fitch, which rely on Asia for production, have also said factory closures in Vietnam and clogged ports have meant their shelves haven’t been as stocked in recent weeks as they would have wanted.

Gap now expects full-year revenue to be up about 20%, which is less that its prior outlook of about a 30% increase. Analysts polled by Refinitiv had been looking for a 28.4% year-over-year gain.

Gap’s expectations for adjusted full-year earnings have been lowered to a range of $1.25 to $1.40 per share, from a prior range of $2.10 to $2.25 a share. Analysts had expected Gap to earn $2.20 per share, Refinitiv said.

The company said its revised outlook takes into account roughly $550 million to $650 million of lost sales from supply chain constraints and about $450 million in air freight costs for the year.

Old Navy was disproportionately impacted by supply chain delays, particularly its women’s assortment, Gap said. As a result, same-stores sales fell 9% year over year, but remained up 6% compared with 2019.

This is particularly bad news for the company considering Old Navy has been a major growth engine for Gap in recent quarters. It has made significant investments in Old Navy, including overhauling its plus-size apparel assortment. A slowdown at Old Navy therefore is a more sizable drag on the entire business.

At its namesake Gap brand, same-store sales rose 7% from a year earlier and were up 3% versus 2019. Syngal said ongoing store closures have helped the brand report healthier growth. Gap is also focused on trimming back merchandise in stores to keep the locations “lighter and brighter,” she said.

At Banana Republic, which focuses more on selling work wear for women, same-store sales rose 28% from year-ago levels and fell 10% on a two-year basis.

Same-store sales at Athleta, Gap’s rival to Lululemon and Nike for women, increased 2% from a year earlier and rallied 41% versus 2019.

One bright spot in Gap’s report was the apparel maker’s ability to raise its product prices. Gross margins were 42.1% in the third quarter, Gap’s highest rate for this period in 10 years. The company said its third-quarter discount rate was also the lowest in five years.

The company is also betting that a tie-up with rapper Kanye West’s Yeezy line will boost sales and lure in new customers. On an earnings call, Syngal said a Yeezy hoodie brought in the most sales in one day, online from a single item in Gap’s history.

Find the full earnings release from Gap here.

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