As A Result Of Declining Sales And A Shake-Up In The Executive Ranks, Gap Announces A Big Loss

The struggling fashion retailer Gap reported disappointing holiday-quarter results on Thursday, and it announced a series of executive changes as it looks to find a permanent CEO for the company.

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Trading after hours resulted in a decline in the company's shares.

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According to Refinitiv's survey of analysts, here's how the company performed in its fiscal fourth quarter:

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Loss per share: 75 cents, vs. 46 cents expected

Revenue: $4.24 billion vs. $4.36 billion expected

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For the three months that ended Jan. 28, the company reported losses of $273 million, or 75 cents per share, compared with a loss of $16 million, or 4 cents per share, for the same period a year earlier.

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There were $4.24 billion in sales for Gap in the third quarter, which was down 6% from $4.53 billion a year ago. In comparison to last year, comparable sales were down 5% year-over-year and store sales were down 3% year-over-year. Sales from the company's website, which represent 41% of the company's total net sales, have plummeted by 10% compared to last year, according to the company.

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There have been many challenges facing the apparel retailer - which includes Old Navy, Banana Republic, and Athleta in addition to its namesake brand - over the past year, including numerous net losses, bloated inventory levels, and a search for a permanent CEO. The interim CEO of Gap, Bob Martin, explained to investors during an earnings call that the board has narrowed its search and that the next chief executive of Gap will be an external candidate.

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As the company has struggled to regain its profitability, it has announced that it will be eliminating its chief growth officer position, which was held by Asheesh Saksena for the past two years, as of Thursday. The CEO of Athleta, Mary Beth Laughton, also left the company on Thursday after more than a decade there.

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“There is no doubt that Athleta has immense potential, but it has suffered from product acceptance challenges over the past several quarters," Martin stated in a statement. "In order for us to capitalize on this potential and remain competitive in a highly dynamic market, we believe this is the right time for us to bring in a new leader who can position Athleta for long-term success as a result of this potential."

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Sheila Peters, the Chief People Officer, will also leave at the end of the year.

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Gap issued a muted outlook for the fiscal year 2023. The company plans to close 50 to 55 Gap and Banana Republic stores and open 30 to 35 Athleta and Old Navy stores in its place. The company expects that net sales for the first quarter of fiscal 2023 will decline in the low to mid-single digit range as compared to the previous fiscal year and that net sales for fiscal 2024 will decrease in the low to mid-single digit range as compared to the prior fiscal year. However, the company does expect gross margins to increase during the first quarter of this year as well as during the entire year.

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This forecast was based on the company's assessment that the "consumer and macroeconomic environments continue to be uncertain.".

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In the past year, Gap has struggled to keep up with demand due to global supply chain constraints. In order to meet demand, Gap had to fly in apparel from overseas to keep up with demand. Even so, backlogs and delays kept inventories in transit so that by the time the items finally arrived, they were already out of season or out of style, which forced the company to offer steep discounts that cut into profits as a result.

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Gap reported on Thursday that inventory declined 21% over the previous year, which is a bright spot for the company.

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In total, the company's net sales declined to $15.62 billion for the year, down from $16.67 billion during the prior fiscal year. For the fiscal year ending in March, the company recorded a net loss of $202 million, compared to a net income of $256 million in the fiscal year preceding.

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Here’s how each brand fared in the quarter:

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• Gap's Old Navy subsidiary, which accounts for the majority of Gap's revenue, posted $2.2 billion in sales for the quarter, down 6% from a year earlier. Low-income consumers have pulled back from the retailer amid high inflation and softness in the kids and baby categories, which has been partially offset by strength in the women's wear categories. 

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• The Gap's sales were down 9% year-over-year to $1.1 billion, a decrease of 9% from the previous year. In North America, comparable sales were down by 5% compared to last year. As with Old Navy, this brand has seen softness in the kids and baby category, which has been offset by strength in the women's category, which has been similar to Old Navy's. 

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• Banana Republic posted $578 million in sales last year, a drop of 6% compared to the previous year's sales. There was a pullback in outerwear and sweaters as well as its holiday gifting assortment that was responsible for the company's drop in sales. A similar growth was seen in dresses and suits, as consumers continue to venture back out into the world and refresh their wardrobes for going out and heading to work as well as for going to a night out. 

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• Athleta, the athleisure unit that was one of the big winners during the pandemic, saw a 1% drop in sales to $436 million for the full year. As a result of what the company described as "continued product acceptance challenges" - or problems consumers have with the brand's product assortment - the company reported a 5% decline in comparable sales.

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As of the beginning of this fiscal year, Gap had originally forecast adjusted earnings per share to range from $1.85 to $2.05. Sales for the fiscal year were expected to grow at a low single-digit percentage rate. Amidst plunging sales, it slashed that guidance and then rescinded it altogether halfway through the year as a result.

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As a result of the uncertain macroeconomic environment as well as the company's ongoing efforts to make changes and find a new CEO, the company decided to withdraw its outlook.

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Sonia Syngal abruptly resigned as the chief executive of the company at the beginning of July. Despite the company's efforts, a permanent replacement has yet to be found. For the time being, Martin has been serving as the retailer's interim CEO despite the fact that he is the retailer's executive chairman.

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Gap suffered $53 million in impairment charges in the previous quarter after Ye, the rapper formerly known as Kanye West, terminated his contract with the retailer in the wake of reported contract breaches and a lack of creative control on his part. Following Ye's anti-Semitic remarks in late October, Gap removed all Yeezy products from its stores as a result.