Gap to Shed ‘Unproductive’ Inventory, Cut Receipts as It Swings to a Loss in Q2

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 impacting the lower-income consumer and the wrong merchandise mix and sizes at its Old Navy banner for its recent trouble.

In the second quarter, net sales at Gap Inc. decreased 8% over last year to $3.86 billion. Comparable sales were down 10% year-over-year, while online sales declined 6% and store sales declined 10% compared to the same time last year.

By brand, net sales at the Gap brand were down 10% in Q2 to $881 million, in part due to inflation hitting the Gap Outlet customer and ongoing and planned store closures. At Old Navy, which was plagued with the wrong inventory, net sales were down 13% in Q2 to $2.1 billion. Athleta was up 1% in the quarter with net sales of $344 million, which the company attributed to a customer shift away from athleisure. Banana Republic, meanwhile, was the bright spot, increasing 9% to $539 million in Q2.

On the company’s earnings call on Thursday, CFO Katrina O’Connell said the Gap will write off “unproductive inventory” in the second quarter and cut receipts across the assortment beginning in late fall and into holiday. These actions, according to O’Connell, will allow each brand to have responsive inventory levels and will allow the ability to chase into demand in fiscal 2023.

Pressed further by analysts on Thursday’s call, O’Connell added that most of the inventory that will be written off is spring and summer fashion at Old Navy as well as “a lot” of the extended size inventory at the banner, which was determined to be “really hard to clear” as it moves to the third quarter. “These items will be taken out of Old Navy stores over the next couple of weeks as the teams are able to navigate the workload between back-to-school and pulling that inventory out of stores,” the CFO said.

The company ended the latest quarter with inventory of $3.1 billion, up 37% from the prior year. Some of this was intentionally packed away to be sold in another season, and some of it is still in transit, Gap said.

O’Connell added on Thursday’s call that the company is also implementing a slew of cost-cutting measures including a pause on planned hiring and open positions, as well a slowdown in spending across marketing and digital platform investments.

The company has also cut or deferred some capital spending and reduced the number of new Old Navy stores slated to open in the back half of the year. This now brings capital expenditures to approximately $650 million for the year compared to prior expectations of $700 million, O’Connell added.

“While these measures will help us in the short term, ultimately, they represent a down payment towards a larger pursuit,” Gap Inc.’s executive chairman and interim CEO, Bob Martin, said on Thursday’s call. “We must demand both a selling and a cost-conscious culture with a focus on the core levers that truly drive our business.”

Gap said in its earnings statement on Thursday that it started to see an improvement in sales trends in July and into August, coinciding with a drop in gas prices. However, the company is not offering a forecast for its full fiscal year due to ongoing uncertainty around consumer behavior and promotions at other retailers.

These results come one month after Sonia Syngal stepped down from her role as Gap Inc. CEO. What’s more, Old Navy tapped Horacio “Haio” Barbeito as its new president and CEO last month. Barbeito replaces Nancy Green, who stepped down from the role in April.

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