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Gap reduces outlook for 2021 as sales suffer amid supply chain disruption

Tom Shearsmith
24 November 2021

Gap Inc., the parent company of brands including Old Navy, GAP, Banana Republic and Athleta, has reported a Q3 sales of $3.9 billion, down 1% compared to 2019, with supply chain disruption driving an estimated 8% point negative impact due to constrained inventory.

The company reports that it remains focused on digital dominance through investing in its ecommerce platform, strategically closing unprofitable stores and partnering to amplify in international markets, such as the UK.

Online sales grew 48% compared to the third quarter of 2019 and represented 38% of the total business, even as store traffic continues to rebound. Third quarter comparable sales were up 5% versus 2019.

Global supply chain disruption, including COVID-related factory closures and continued port congestion, caused significant product delays in the third quarter. Meaningfully reduced inventory positions throughout the quarter negatively impacted sales as brands were unable to fully meet strong consumer demand.

The company noted that whilst supply chain constraints continue, it is leveraging increased air freight and port diversification to navigate ongoing delivery challenges for holiday.

At the GAP brand, net sales declined 10% versus 2019, with permanent store closures resulting in an estimated 18% net sales decline. Global comparable sales increased 7% year-over-year and increased 3% versus 2019.

To date, Gap has entered into partnership agreements in the UK, Ireland, France, and Italy, which are expected to improve the profitability of its European business. GAP's "Partner to Amplify" strategy aims to continue brand appeal, with the launch of the Yeezy Gap Hoodie delivering the most sales by an item in a single day in history with 70% of customers being new to the brand.

British clothing retailer Next will run the GAP business in the UK and Ireland as a franchise partner. Under the agreement, the two companies will form a joint venture to operate Gap’s e-commerce business across the Next Total Platform.

Operating expenses were $1.51 billion or 38.2% of net sales on a reported basis. Excluding a charge of $26 million related to transitioning the company’s European business to a partnership model, adjusted operating expenses were $1.48 billion or 37.6% of net sales.

Sonia Syngal, CEO, Gap Inc., said: “While we entered the third quarter with growing momentum, acute supply chain headwinds affected our ability to fully meet strong customer demand. 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 digitising our business with an eye on creating a better future, faster.”

The company now expects its reported full-year diluted earnings per share to be in the range of $0.45 to $0.60, which includes a $325 million loss on extinguishment of debt and approximately $120 million in net charges primarily related to changes to its European operating model.

The guidance includes an estimated $550 to $650 million of lost sales from supply chain constraints on available inventory, as well as approximately $450 million in total air freight expense for the year.

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