American apparel company Gap’s sales down in Q2 FY22

Gap Inc, one of the largest specialty apparel companies in the US, has reported a slump in its sales in its second quarter ( Q 2 ) of fiscal 2022 ( F Y 2 2 ) ended July 30, 2022. Its net sales of $3.86 billion were down 8 per, while online sales declined 6 per cent compared to last year. The company’s comparable sales were down 10 per cent year-over-year.

Store sales declined 10 per cent compared to last year. The company ended the quarter with 3390 store locations in over 40 countries, of which 2799 were company operated. Reported gross margin was 34.5 per cent; adjusted gross margin, excluding a $58 million charge related to the impairment of unproductive inventory, was 36 per cent, deleveraging 730 basis points versus last year, the company said in a press release.

On a reported basis, merchandise margins were down 850 basis points versus last year; adjusted for the inventory impairment, merchandise margins declined 700 basis points. Merchandise margins were negatively impacted by an estimated $50 million, or 130 basis points, of incremental transitory air freight costs, and the remaining decline of approximately 570 basis points was driven by higher discounting, primarily at Old Navy, and inflationary commodity price increases. The declines were partially offset by the benefit of lower discounting at Banana Republic.

Gap’s reported operating loss was $28 million in the quarter and reported operating margin was 0.7 per cent, while adjusted operating income was $65 million and adjusted operating margin of 1.7 per cent. Reported net loss of the company was $49 million and adjusted net income was $30 million, which excludes the inventory impairment and Old Navy Mexico charge.

Gap ended the quarter with cash and cash equivalents of $708 million and its net cash from operating activities was negative $207 million. Ending inventory of $3.1 billion was up 37 per cent year-over-year. This includes nearly 10 percentage points of pack and hold inventory and 7 percentage points of in-transit.

Gap’s year-to-date capital expenditures were $406 million and share repurchases were $57 million, representing 5.7 million shares.

Old Navy’s net sales of $2.1 billion were down 13 per cent compared to last year and comparable sales were down 15 per cent. The Gap brand’s net sales of $881 million were down 10 per cent compared to last year. The brand was impacted by category mix imbalances during the quarter. Its global comparable sales were down 7 per cent and North American comparable sales were down 10 per cent.