Unable to count on Old Navy for strength, Gap Inc. Q2 net sales fell 8% year over year to $3.86 billion, with comps down 10%, e-commerce down 6% and store sales down 10%. Inventory was up 37% at quarter’s end, per a company press release.
Old Navy net sales fell 13%, as comps fell 15%, hurt by size and assortment imbalances, inventory delays and slowing demand from lower-income shoppers. Gap brand sales fell 10% as comps fell 7%. Athleta sales edged up 1% but comps fell 8%. Banana Republic continued its rebound, with sales up 9% and comps up 8%.
Gap Inc. swung into the red as net loss reached $49 million from last year’s $258 million in net income. Merchandise margins contracted by 850 basis points, due in part to air freight costs, higher commodity prices and heavier discounting, mostly at Old Navy. That was partly offset by lower discounting at Banana Republic, the company said.
Unsurprisingly, Gap Inc. withdrew its forecast for the year, as other retailers have done in recent weeks amid weak discretionary spending, especially among lower-income households. The company didn’t provide an update on its expectations but said it is “cautiously optimistic” given some improvements through the second quarter.
In addition to the macro environment, the retailer is “navigating a unique set of circumstances” including a CEO transition and new leadership at Old Navy, its largest brand, Chief Financial Officer Katrina O’Connell said on a call with analysts Thursday.
“On top of that, the intensifying promotional background and signs of weak demand in the low-income consumer are making forecast precision increasingly difficult,” she said.
It’s unfortunate that the apparel conglomerate is facing the tough moment with only interim leadership following Sonia Syngal’s abrupt exit earlier this summer, according to GlobalData Managing Director Neil Saunders.
“Overall, we are nervous about Gap,” he said in emailed comments. “It is in dangerous waters and still lacks a permanent captain at the helm which does not bode well for the balance of this year.”
O’Connell emphasized that the company is taking bold action, including writing off unproductive inventory, cutting back on new inventory and “aggressively” managing overhead costs and reevaluating its tech and marketing investments. But such moves are coming at a bad time, according to Credit Suisse analyst Michael Binetti.
“We see a tough road ahead if [Gap Inc.] is cutting costs as it attempts to reignite demand at its brands ahead of what we think will be a super competitive Holiday in 2022,” Binetti said in a Thursday client note.
Gap’s situation — macroeconomics plus its own merchandising missteps at Old Navy and Athleta — have upended its strategy of leaning on the established discount brand while growing the athleisure brand. Old Navy has scaled back a much-touted inclusive-sizing campaign and sales in the second quarter “were negatively impacted by size and assortment imbalances, ongoing inventory delays [and] product acceptance issues in some key categories,” the company said in its release. Meanwhile, Athleta dealt with a “shift in consumer preference from athleisure to occasion and work-based categories as well as modest spring/summer product acceptance challenges.”
The company’s inventory issues, its customer base centered on middle- to low-incomes and the prospect of the need to burn through its cash add up to “too many moving pieces, too little visibility,” according to Wells Fargo analysts led by Ike Boruchow.
“The business simply has too many holes right now to be constructive — leadership, their bellwether Old Navy brand, their growth vehicle Athleta ... everything lacks visibility,” those analysts said on Thursday.