Gap escaped worst-case with supply chain dragging on Q4

Live Brief:

  • Gap Inc.’s sales ticked up by 2% year over year to $4.5 billion in the fourth quarter while comparable sales rose 3%. The company’s operating margin barely edged over zero as air freight costs ate into its margins.
  • For the year, the apparel giant rebounded from 2020’s steep declines. Net sales reached $16.7 billion, up 21% over 2020 and up 2% from fiscal 2019.
  • Gap’s Athleta drove most of the company’s Q4 sales growth and offset declines at other brands. Athleta’s net sales rose 52% from 2019, while Banana Republic was down 11%, Gap was down 13% and Old Navy’s sales were “muted,” up just 2% from 2019, the company said.

Live Insight:

Gap’s experience in 2021 is a useful case study in supply chain risk, with the apparel seller’s costs rising and sales falling in tandem because of various snags in production and shipping.

Roughly a third of the company’s products come out of factories in Vietnam, according to its filings. Gap Inc. CEO Sonia Syngal told analysts this week that a “sudden and prolonged closure of in Vietnam” created delays of eight to 10 weeks in seasonal factories product last year, according to a Seeking Alpha transcript.

To meet demand, the company had to shell out hundreds of millions of dollars to ship product by air and avoid lengthy, highly congested ocean routes. For Q4 alone Gap spent $275 million on air freight. For the year the figure was $430 million. “As a result, sales were muted and pressured profits,” Syngal said, describing the combined impact of high freight costs and delays.

She went on to outline how Gap Inc. is revamping and “de-risking” its supply chain. Syngal said the company has accelerated booking deadlines for its spring product and booked summer product even earlier, while factoring in extended transit times to add a buffer.

The company is also diversifying its port exposure. Syngal said that, starting with Gap Inc.’s summer products, it will move “the vast majority” of products through Eastern and Southern ports to dodge delays in West Coast ports.

Perhaps the most important move Gap is making in the long run to reduce its supply chain risk is adjusting the geographic spread of its manufacturing base, with the company planning to grow its sourcing in Mexico and Central America this year. Syngal also noted that digital product design could help speed up development time, which in turn could ease supply chain pressures.

Roxanne Meyer, managing director with MKM Partners, said that Gap Inc.’s Q4 results overall were “better than feared,” with sales coming in ahead of expectations, though the retailer’s negative earnings were “highly disappointing.” (Net loss for the period was $16 million, compared to a $234 million net profit in 2020.)

BMO Capital Markets analyst Simeon Siegel said the company’s Q4 performance was “materially above fears.” At the same time, Siegel said that “the burden of proof is now on [Gap Inc.] to attain” its guidance targets, which call for single-digit revenue growth in 2022. “Absent signs to the contrary, we remain wary that the path up will prove as easy as guidance may suggest,” Siegel said.

Neil Saunders, managing director with GlobalData, pointed to Gap’s net loss as the biggest disappointment in the company’s results. “At a time when most retailers are boosting margins from lower discounting rates, this puts Gap on the wrong side of the tracks,” Saunders said in emailed comments.

Saunders pointed the apparel company’s choosing partnerships and distribution deals over reinvention of its brands. “The danger here is that Gap is simply trading on its heritage and history rather than looking ahead to how the brand can remain relevant,” Saunders said.

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