Spread to eliminate “unperforming” inventory and reduce revenue as it swings to a loss in the second quarter

Gap Inc. withdrew its guidance for the year after reporting a net loss of $49 million in the second quarter of 2022.

The beleaguered San Francisco-based company, which is in the midst of a CEO search, cited inflationary pressures affecting the low-income consumer and the wrong mix and sizes of merchandise at its Old Navy banner for its recent troubles.

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In the second quarter, Gap Inc.’s net sales fell 8% from a year ago to $3.86 billion. Same-store sales were down 10% year over year, while online sales were down 6% and in-store sales were down 10% from the same period last year.

By brand, second-quarter Gap brand net sales were down 10% to $881 million, in part due to inflation hitting the Gap Outlet customer and ongoing store closures and planned. To Old Navy, which was suffering from poor inventory, net sales fell 13% in the second quarter to $2.1 billion. Athleta rose 1% in the quarter with net sales of $344 million, which the company attributed to customer diversion from athleisure. Banana Republic, meanwhile, was the bright spot, rising 9% to $539 million in the second quarter.

During the company’s earnings call on Thursday, Chief Financial Officer Katrina O’Connell said Gap will write off “dead inventory” in the second quarter and reduce assortment revenue starting in late fall. and during the holidays. These actions, according to O’Connell, will allow each brand to have responsive inventory levels and help meet demand in fiscal year 2023.

Pressed further by analysts on Thursday’s call, O’Connell added that the bulk of the inventory to be written off is spring and summer fashion at Old Navy as well as “a large portion” of clothing. size inventory extended to the banner, which has been determined to be “really hard to clear” as it moves into the third quarter. “These items will be removed from Old Navy stores over the next two weeks as teams are able to manage the workload between back to school and the removal of this inventory from stores,” the CFO said.

The company ended the last quarter with inventory of $3.1 billion, up 37% from a year earlier. Some was intentionally packaged to be sold in another season, and some is still in transit, Gap said.

O’Connell added during Thursday’s call that the company was also implementing a series of cost-cutting measures, including a pause in planned hiring and vacancies, as well as a slowdown in spending on investments. in marketing and digital platforms.

The company has also reduced or postponed some capital expenditures and reduced the number of new Old Navy stores slated to open in the second half of the year. That now brings capital spending to about $650 million for the year, down from earlier expectations of $700 million, O’Connell added.

“While these steps will help us in the short term, they ultimately represent a down payment toward a broader pursuit,” Gap Inc. executive chairman and interim CEO Bob Martin said on Thursday’s call. . “We need to demand both a sales culture and a cost-conscious culture, focusing on the key levers that truly drive our business.”

Gap said in its earnings statement Thursday that it began to see improving sales trends in July and August, coinciding with lower gasoline prices. However, the company is not offering a forecast for its full fiscal year due to continued uncertainty regarding consumer behavior and promotions at other retailers.

These results come a month later Sonia Syngal resigned from his role as CEO of Gap Inc. Additionally, Old Navy named Horacio “Haio” Barbeito as its new president and CEO last month. barbeito replaces Nancy Greenwho left office in April.

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