THE GAP, INC. OUR BUSINESS
We are a collection of purpose-led, lifestyle brands offering apparel, accessories, and personal care products for men, women, and children under theOld Navy , Gap,Banana Republic , and Athleta brands. As ofJuly 30, 2022 , we had Company-operated stores inthe United States ,Canada ,Japan ,China ,Taiwan , andMexico . Our products are available to customers online through Company-owned websites and through the use of third parties that provide logistics and fulfillment services. We also have franchise agreements with unaffiliated franchisees to operateOld Navy , Gap,Banana Republic , andAthleta throughoutAsia ,Europe ,Latin America , theMiddle East , andAfrica . Under these agreements, third parties operate, or will operate, stores and websites that sell apparel and related products under our brand names. In addition to operating in the specialty, outlet, online, and franchise channels, we use our omni-channel capabilities to bridge the digital world and physical stores to further enhance our shopping experience for our customers. Our omni-channel services, including curbside pick-up, buy online pick-up in store, order-in-store, find-in-store, and ship-from-store, as well as enhanced mobile-enabled experiences, are tailored uniquely across our collection of brands. Most of the products sold under our brand names are designed by us and manufactured by independent sources.
OVERVIEW
Financial results for the second quarter of fiscal 2022 are as follows:
•Net sales for the second quarter of fiscal 2022 decreased 8 percent compared with the second quarter of fiscal 2021.
•Online sales for the second quarter of fiscal 2022 decreased 6 percent compared with the second quarter of fiscal 2021 and store sales for the second quarter of fiscal 2022 decreased 10 percent compared with the second quarter of fiscal 2021. •Gross profit for the second quarter of fiscal 2022 was$1.33 billion compared with$1.82 billion for the second quarter of fiscal 2021. Gross margin for the second quarter of fiscal 2022 was 34.5 percent compared with 43.3 percent for the second quarter of fiscal 2021.
•Operating loss for the second quarter of fiscal 2022 was
•The effective income tax rate for the second quarter of fiscal 2022 was negative 2.1 percent compared with 28.1 percent for the second quarter of fiscal 2021.
•Net loss for the second quarter of fiscal 2022 was
•Diluted loss per share was
During the second quarter of fiscal 2022, our quarterly results were negatively impacted by macro-economic challenges including global supply chain disruptions and global inflationary pressures, as well as continued size and assortment imbalances leading to product acceptance issues and higher levels of promotional activity, largely atOld Navy . Global supply chain disruptions continued to affect our quarterly results due to difficulty managing the timing of seasonal inventory flows and an inability to quickly react to changing consumer preferences. As a result of the ongoing inventory delays and shifting consumer preferences, inventory levels are higher with an increase in select seasonal product being stored at distribution centers for expected introduction into the market in the second half of fiscal 2022 and first half of fiscal 2023. Beginning in the second quarter of fiscal 2022, the Company has begun taking several actions to improve profitability and cash flow in the near term including reducing operating expenses and capital expenditures, which are expected to continue in the second half of fiscal 2022. These actions also include rebalancing our inventory assortments to better meet consumer needs by reducing future receipts and impairing unproductive inventory. As a result of our inventory rebalancing efforts, the Company recorded pre-tax inventory impairment costs of$58 million during the second quarter of fiscal 2022, primarily related to seasonal product and extended size product atOld Navy . The costs were recorded in cost of goods sold and occupancy expenses in the Condensed Consolidated Statement of Operations. We expect that clearing this inventory atOld Navy will enable us to drive an improved customer experience and better showcase the merchandise that resonates most with our customer. We remain focused on our key initiatives for our Power Plan strategy. Each of our purpose-led, lifestyle brands are finding new and relevant ways to expand customer reach. In the second quarter of fiscal 2022, we have continued to expand into new lifestyle categories through ongoing product collaborations forAthleta and Gap. Additionally, we launched a new long-term credit card program with Barclays and Mastercard which we expect to help us grow and deepen our connections with our loyalty customers. As part of the Power Plan strategy, the Company is also continuing to reduce the number ofGap andBanana Republic stores inNorth America by approximately 350 stores from the beginning of fiscal 2020 to the end of fiscal 2023. As ofJuly 30, 2022 , we have closed, net of openings, 269Gap andBanana Republic stores inNorth America since the beginning of fiscal 2020. 18 -------------------------------------------------------------------------------- Additionally, we believe strategic transformations of our business model will streamline our operations by using strong local partnerships to grow our brands and amplify our reach. As part of the Company's joint venture with Next Plc ("Next"), the first Gap branded shop-in-shop opened in theUnited Kingdom in fiscal 2022, and the joint venture is planning to launch additional shop-in-shops in theUnited Kingdom throughout the second half of fiscal 2022. During the second quarter of fiscal 2022, the Company worked to migrate Gap'sUnited Kingdom andIreland e-commerce business to the Next Total Platform, with the transition completed onAugust 10, 2022 . During the second quarter of fiscal 2022, we received regulatory approvals to transition our Old Navy Mexico operations to Grupo Axo to operate Old Navy Mexico stores as a franchise partner. As a result of this transaction, the Company recognized a pre-tax loss of$35 million within operating expenses on the Condensed Consolidated Statement of Operations during the 13 weeks endedJuly 30, 2022 . OnAugust 1, 2022 , we closed the transaction with Grupo Axo. OnJuly 11, 2022 ,Sonia Syngal stepped down as President and Chief Executive Officer and resigned from the Company's Board. On the same date,Bob L. Martin , the Executive Chair of the Board, began serving as President and Chief Executive Officer on an interim basis.
We remain focused on the following strategic priorities in the near term:
•driving improved sales through assortment improvements and a balanced and relevant category mix;
•reducing our fixed cost structure to improve profitability and manage through current macro-economic challenges;
•leveraging our scale to navigate disruptions and constraints in global supply chain;
•managing inventory to support a healthy merchandise margin;
•rationalizing the
•prioritizing asset-light growth through licensing, online, and franchise partnerships globally;
•creating product that offers value to our customers through a combination of fit, quality, brand, and price;
•optimizing investments in our four purpose-led lifestyle brands to drive relevance and gain market share;
•growing our online business;
•attracting and retaining strong talent in our businesses and functions; and
•continuing to integrate social and environmental sustainability into business practices to support long-term growth.
We believe focusing on these priorities in the near term will enable the Company to execute against its Power Plan strategy, including leveraging:
•The Power of its Brands, reflected by the Company's four purpose-led, lifestyle
brands:
•The Power of its Portfolio, which enables growth synergies across key customer categories; and
•The Power of its Platform, which leverages the Company's powerful platform to
both enable growth, such as through competitive omni-channel capabilities, as
well as cost synergies, fueled by its scaled operations.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
See Note 2 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for net sales disaggregation.
Comparable Sales ("Comp Sales")
Comp Sales include the results of Company-operated stores and sales through online channels. The calculation ofGap Inc. Comp Sales excludes the results of our franchise business.Gap Inc. Comp Sales included the results ofJanie and Jack and Intermix until the divestitures of those brands in fiscal 2021. A store is included in the Comp Sales calculations when it has been open and operated by the Company for at least one year and the selling square footage has not changed by 15 percent or more within the past year. A store is included in the Comp Sales calculations on the first day it has comparable prior year sales. Stores in which the selling square footage has changed by 15 percent or more as a result of a remodel, expansion, or reduction are excluded from the Comp Sales calculations until the first day they have comparable prior year sales.
A store is considered non-comparable ("Non-comp") when it has been open and operated by the Company for less than one year or has changed its selling square footage by 15 percent or more within the past year.
A store is considered "Closed" if it is temporarily closed for three or more full consecutive days or it is permanently closed. When a temporarily closed store reopens, the store will be placed in the Comp/Non-comp status it was in prior to its closure. If a store was in Closed status for three or more days in the prior year, the store will be in Non-comp status for the same days the following year.
Current year foreign exchange rates are applied to both current year and prior year Comp Sales to achieve a consistent basis for comparison.
The percentage change in Comp Sales by global brand and for
13 Weeks Ended 26 Weeks Ended
July 30, July 31, July 30, July 31,
2022 2021 2022 2021
Old Navy Global (15) % - % (19) % 12 %
Gap Global (7) % (5) % (9) % 8 %
Banana Republic Global 8 % 41 % 16 % 18 %
Athleta Global (8) % 13 % (8) % 19 %
The Gap, Inc. (10) % 3 % (12) % 13 %
20
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Store count, openings, closings, and square footage for our stores are as
follows:
January 29, 2022 26 Weeks Ended July 30, 2022 July 30, 2022
Number of Number of Number of Number of Square Footage
Store Locations Stores Opened Stores Closed Store Locations (in millions)
Old Navy North America 1,252 16 5 1,263 20.2
Gap North America 520 2 12 510 5.4
Gap Asia 329 4 31 302 2.5
Gap Europe (1) 11 - - - -
Banana Republic North America 446 2 11 437 3.7
Banana Republic Asia 50 1 - 51 0.2
Athleta North America 227 13 4 236 1.0
Company-operated stores total 2,835 38 63 2,799 33.0
Franchise (1) 564 30 14 591 N/A
Total 3,399 68 77 3,390 33.0
Decrease over prior year (3.0) % (3.8) %
January 30, 2021 26 Weeks Ended July 31, 2021 July 31, 2021
Number of Number of Number of Number of Square Footage
Store Locations Stores Opened Stores Closed Store Locations (in millions)
Old Navy North America 1,220 30 5 1,245 20.0
Gap North America 556 1 15 542 5.7
Gap Asia 340 9 10 339 2.9
Gap Europe 117 1 28 90 0.7
Banana Republic North America 471 1 11 461 3.9
Banana Republic Asia 47 3 2 48 0.2
Athleta North America 199 13 - 212 0.9
Intermix North America (2) 31 - - - -
Janie and Jack North America (2) 119 - - - -
Company-operated stores total 3,100 58 71 2,937 34.3
Franchise 615 40 98 557 N/A
Total 3,715 98 169 3,494 34.3
Decrease over prior year (8.4) % (4.2) %
__________
(1)The 11 Gap Italy stores that were transitioned to OVS during the period are
not included as store closures or openings for Company-operated and Franchise
store activity. The ending balance for Gap Europe excludes these stores and the
ending balance for Franchise includes these stores.
(2)On April 8, 2021 , the Company completed the divestiture of the Janie and Jack
brand. On May 21, 2021 , the Company completed the divestiture of the Intermix
brand. The 150 stores divested are not included as store closures or in the
ending balance for fiscal 2021.
Outlet and factory stores are reflected in each of the respective brands.
21
--------------------------------------------------------------------------------Our net sales for the second quarter of fiscal 2022 decreased$354 million , or 8 percent, compared with the second quarter of fiscal 2021, driven primarily by Old Navy Global as a result of inventory delays related to continued global supply chain disruptions, as well as continued size and assortment imbalances. The decrease in net sales was also driven by strategic store closures, as well as an unfavorable impact of foreign exchange of$43 million . The foreign exchange impact is the translation impact if net sales for the second quarter of fiscal 2021 were translated at exchange rates applicable during the second quarter of fiscal 2022. The decrease in net sales was partially offset by the positive impact of growth in Banana Republic Global net sales. Our net sales for the first half of fiscal 2022 decreased$868 million , or 11 percent, compared with the first half of fiscal 2021, driven primarily by Old Navy Global as a result of inventory delays related to continued global supply chain disruptions, as well as continued size and assortment imbalances. The decrease in net sales was also driven by strategic store closures and the divestitures of theJanie and Jack and Intermix brands last year, as well as an unfavorable impact of foreign exchange of$51 million . The foreign exchange impact is the translation impact if net sales for the first half of fiscal 2021 were translated at exchange rates applicable during the first half of fiscal 2022. The decrease in net sales was partially offset by the positive impact of growth in Banana Republic Global net sales.
Cost of Goods Sold and Occupancy Expenses
13 Weeks Ended 26 Weeks Ended
July 30, July 31, July 30, July 31,
($ in millions) 2022 2021 2022 2021
Cost of goods sold and occupancy expenses $ 2,527 $ 2,388 $ 4,908 $ 4,749
Gross profit $ 1,330 $ 1,823 $ 2,426 $ 3,453
Cost of goods sold and occupancy expenses as a
percentage of net sales 65.5 % 56.7 % 66.9 % 57.9 %
Gross margin 34.5 % 43.3 % 33.1 % 42.1 %
Cost of goods sold and occupancy expenses increased 8.8 percentage points as a
percentage of net sales in the second quarter of fiscal 2022 compared with the
second quarter of fiscal 2021.
•Cost of goods sold increased 8.5 percentage points as a percentage of net sales
in the second quarter of fiscal 2022 compared with the second quarter of fiscal
2021, in part due to increased average unit costs which were impacted by higher
air freight expenses and commodity price increases. Additionally, the remaining
increase was driven by higher promotional activity and inventory impairment
primarily at Old Navy Global partially offset by the benefit of lower
discounting at Banana Republic Global.
•Occupancy expenses increased 0.3 percentage points as a percentage of net sales
in the second quarter of fiscal 2022 compared with the second quarter of fiscal
2021, primarily driven by a decrease in net sales without a corresponding
decrease in fixed occupancy expenses.
Cost of goods sold and occupancy expenses increased 9.0 percentage points as a
percentage of net sales in the first half of fiscal 2022 compared with the first
half of fiscal 2021.
•Cost of goods sold increased 8.0 percentage points as a percentage of net sales
in the first half of fiscal 2022 compared with the first half of fiscal 2021,
primarily driven by increased average unit costs which were impacted by higher
air freight expenses and commodity price increases, as well as higher
promotional activity.
•Occupancy expenses increased 1.0 percentage points as a percentage of net sales
in the first half of fiscal 2022 compared with the first half of fiscal 2021,
primarily driven by a decrease in net sales without a corresponding decrease in
fixed occupancy expenses.
Operating Expenses
13 Weeks Ended 26 Weeks Ended
July 30, July 31, July 30, July 31,
($ in millions) 2022 2021 2022 2021
Operating expenses $ 1,358 $ 1,414 $ 2,651 $ 2,804
Operating expenses as a percentage of net sales 35.2 % 33.6 % 36.1 % 34.2 %
Operating margin (0.7) % 9.7 % (3.1) % 7.9 %
Operating expenses decreased $56 million but increased 1.6 percentage points as
a percentage of net sales in the second quarter of fiscal 2022 compared with the
second quarter of fiscal 2021 primarily due to a decrease in net sales as well
as a decrease in performance-based compensation, partially offset by a loss on
divestiture activity related to the transition of the Old Navy Mexico business.
22
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Operating expenses decreased $153 million but increased 1.9 percentage points as
a percentage of net sales in the first half of fiscal 2022 compared with the
first half of fiscal 2021 primarily due to a decrease in net sales as well as
the following:
•a decrease in performance-based compensation; and
•a decrease in loss on divestiture activity during the first half of fiscal 2022 compared with the first half of fiscal 2021; partially offset by
•an increase in advertising expense.
Interest Expense
13 Weeks Ended 26 Weeks Ended
July 30, July 31, July 30, July 31,
($ in millions) 2022 2021 2022 2021
Interest expense $ 21 $ 51 $ 41 $ 105
Interest expense decreased $30 million or 59 percent during the second quarter
of fiscal 2022 compared with the second quarter of fiscal 2021 and decreased $64
million or 61 percent during the first half of fiscal 2022 compared with the
first half of fiscal 2021 primarily due to lower interest rates and principal
for outstanding borrowings.
Income Taxes
13 Weeks Ended 26 Weeks Ended
July 30, July 31, July 30, July 31,
($ in millions) 2022 2021 2022 2021
Income taxes $ 1 $ 101 $ (53) $ 122
Effective tax rate (2.1) % 28.1 % 20.1 % 22.3 %
The effective tax rate decreased for the second quarter of fiscal 2022 compared with the second quarter of fiscal 2021 and the first half of fiscal 2022 compared with the first half of fiscal 2021 primarily due to changes in valuation allowances and the jurisdictional mix of pre-tax earnings.
LIQUIDITY AND CAPITAL RESOURCES
As of
Source of Outstanding Total Available
($ in millions) Liquidity Indebtedness Liquidity
Cash and cash equivalents $ 708 $ - $ 708
Debt
3.625 percent 2029 Notes 750 750 -
3.875 percent 2031 Notes 750 750 -
Total $ 2,208 $ 1,500 $ 708
We are also able to supplement near-term liquidity, if necessary, with our ABL
Facility or other available market instruments. On July 13, 2022 , we entered
into an amendment and restatement of the ABL Facility. Among other changes, the
amended and restated agreement extended the maturity of the ABL Facility to July
2027 , increased the borrowing capacity, modified the reference rate from LIBOR
to SOFR, and reduced the applicable interest rate margin. As of July 30, 2022 ,
the Company's outstanding borrowing under the ABL Facility was $350 million . See
Note 3 of Notes to Condensed Consolidated Financial Statements included in Part
I, Item 1 of this Form 10-Q, for disclosures on the ABL Facility.
Our largest source of operating cash flows is cash collections from the sale of
our merchandise. Our primary uses of cash include merchandise inventory
purchases, lease and occupancy costs, personnel-related expenses, purchases of
property and equipment, air freight and shipping costs, and payment of taxes. As
our business typically follows a seasonal pattern, with sales peaking during the
end-of-year holiday period, we fund inventory expenditures during normal and
peak periods through cash flows from operating activities and available cash.
Additionally, we have select seasonal product being stored at distribution
centers for expected introduction into the market in the second half of fiscal
2022 and first half of fiscal 2023, which will impact inventory expenditures in
future periods. The seasonality of our operations, in addition to the impact of
global economic conditions such as the uncertainty surrounding the COVID-19
pandemic, the Russia -Ukraine crisis, and global inflationary pressures, may lead
to significant fluctuations in certain asset and liability accounts as well as
cash inflows and outflows between fiscal year-end and subsequent interim
periods.
We believe our existing balances of cash and cash equivalents, along with our
cash flows from operations, and instruments mentioned above, provide sufficient
funds for our business operations as well as capital expenditures, dividends,
and other liquidity requirements associated with our business operations over
the next 12 months and beyond.
23
--------------------------------------------------------------------------------Cash Flows from Operating Activities
Net cash used for operating activities was$207 million during the first half of fiscal 2022 compared with$792 million of cash provided by operating activities during the first half of fiscal 2021, primarily due to the following:
Net Income (Loss)
•Net loss compared with net income in prior comparable period;
Changes in operating assets and liabilities
•a decrease of$296 million related to merchandise inventory primarily as a result of higher inventory during the first half of fiscal 2022 in part due to select seasonal product being stored at distribution centers compared with the utilization during the first half of fiscal 2021 of previously stored seasonal inventory;
•a decrease of
•a decrease of
•an increase of$427 million related to income taxes payable, net of receivables and other tax-related items, primarily due to receipt of tax refunds during the first half of fiscal 2022 related to our fiscal 2020 net operating loss carryback claims.
Cash Flows from Investing Activities
Net cash used for investing activities decreased$144 million during the first half of fiscal 2022 compared with the first half of fiscal 2021, primarily due to the following:
•$333 million in net proceeds received for the sale of a building during the first quarter of fiscal 2022; partially offset by
•$137 million more purchases of property and equipment during the first half of fiscal 2022 compared with the first half of fiscal 2021.
Cash Flows from Financing Activities
Net cash provided by financing activities was$122 million during the first half of fiscal 2022 compared with$183 million of cash used for financing activities during the first half of fiscal 2021, primarily due to$350 million in proceeds received as a result of borrowing under the ABL Facility during the first quarter of fiscal 2022.
Free Cash Flow
Free cash flow is a non-GAAP financial measure. We believe free cash flow is an important metric because it represents a measure of how much cash a company has available for discretionary and non-discretionary items after the deduction of capital expenditures. We require regular capital expenditures including technology improvements to automate processes, engage with customers, and optimize our supply chain in addition to building and maintaining stores. We use this metric internally, as we believe our sustained ability to generate free cash flow is an important driver of value creation. However, this non-GAAP financial measure is not intended to supersede or replace our GAAP results.
The following table reconciles free cash flow, a non-GAAP financial measure, from a GAAP financial measure.
26 Weeks Ended
July 30, July 31,
($ in millions) 2022 2021
Net cash provided by (used for) operating activities
(406) (269)
Free cash flow $ (613) $ 523
Dividend Policy
In determining whether and at what level to declare a dividend, we consider a
number of factors including sustainability, operating performance, liquidity,
and market conditions.
We paid a dividend of $0.15 per share during the second quarter of fiscal 2022.
In August 2022 , the Board authorized a dividend of $0.15 per share for the third
quarter of fiscal 2022.
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--------------------------------------------------------------------------------Share Repurchases
Certain financial information about the Company's share repurchases is set forth in Note 7 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Summary Disclosures about Contractual Cash Obligations and Commercial Commitments
There have been no material changes to our contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K as ofJanuary 29, 2022 , other than those which occur in the normal course of business. See Note 9 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for disclosures on commitments and contingencies.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2022 . See Note 1 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for disclosures on accounting policies.
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