The Gap, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 26 weeks ended July 31, 2021 (fiscal Q2 and first half of fiscal 2021), not 2020 Q2 as indicated in the request metadata. The comparable period ended August 1, 2020.
Business context and reporting period
Gap operates Old Navy, Gap, Banana Republic, and Athleta through stores, online channels, and franchise partners. Management’s Power Plan 2023 emphasizes growing Old Navy and Athleta, repositioning Gap and Banana Republic, digital growth, and a more asset-light business. Results are not necessarily indicative of the full fiscal year and remain affected by COVID-19-related store closures and supply-chain disruption.
Financial results
| Metric | Q2 FY2021 | Q2 FY2020 | First half FY2021 | First half FY2020 |
|---|---|---|---|---|
| Net sales | $4.211 billion | $3.275 billion | $8.202 billion | $5.382 billion |
| Gross profit / margin | $1.823 billion / 43.3% | $1.149 billion / 35.1% | $3.453 billion / 42.1% | $1.417 billion / 26.3% |
| Operating income (loss) | $409 million | $73 million | $649 million | $(1.171) billion |
| Net income (loss) | $258 million | $(62) million | $424 million | $(994) million |
| Diluted EPS | $0.67 | $(0.17) | $1.10 | $(2.66) |
| Cash from operations | Not provided separately | Not provided separately | $792 million | $(87) million |
| Free cash flow (non-GAAP) | Not provided separately | Not provided separately | $523 million | $(295) million |
Q2 sales increased 29% year over year; first-half sales increased 52%. In Q2, store sales rose 72% while online sales fell 15% year over year. The company attributed improved gross margin primarily to stronger demand and lower promotions, reduced online shipping costs, and sales recovery against COVID-affected comparisons. First-half comparisons also benefited from the prior-year period’s substantial store and lease impairment charges.
At July 31, 2021, cash and cash equivalents were $2.375 billion and short-term investments were $337 million. Long-term debt was $2.220 billion on the balance sheet, representing $2.250 billion principal of senior notes due 2023, 2025, and 2027. The $1.8675 billion ABL facility had no borrowings; $52 million of standby letters of credit were issued. Management reported total available liquidity of $2.712 billion after debt, and stated it expected liquidity to cover operations and other needs for the next 12 months. Operating lease liabilities were a further $5.137 billion, including current and long-term portions.
Material changes and unusual items
- Net sales recovery reflects reopened stores and comparison with widespread COVID-related closures in the prior year. Q2 comparable sales were up 3% overall; brand results varied, including a 5% decline at Gap Global and increases at Banana Republic Global and Athleta.
- Gap completed the sales of Janie and Jack and Intermix in April and May 2021, respectively, and recorded a $59 million pretax divestiture loss in the first half.
- Gap incurred $16 million of Q2 pretax costs, primarily employee-related, in connection with its European operating-model review. It planned to close company-operated stores in the UK and Ireland in Q3 and was pursuing partnership models in France and Italy, while intending to retain an online presence in Europe.
- The company had closed a net 213 Gap and Banana Republic stores in North America since the beginning of fiscal 2020, toward a target of approximately 350 closures by the end of fiscal 2023.
- First-half cash flow included a $156 million cash source from lower inventory and a $168 million use from lower accounts payable. The company paid $137 million in dividends and repurchased $55 million of stock during the half.
- A new Barclays/Mastercard credit-card program is expected to begin in Q2 FY2022, replacing the Synchrony private-label program. Gap received $50 million under the new agreements, recorded in other long-term liabilities.
Outlook, risks, and contingencies
The filing provides no quantified full-year sales or earnings guidance. Management said existing cash, investments, operating cash flows, and available facilities should support the business over the next 12 months. The board authorized a Q3 FY2021 dividend of $0.12 per share. Management cautioned that COVID-19 recovery, seasonality, international store closures, and supply-chain constraints may affect results.
Key disclosed risks include changing consumer preferences, competition, inventory and merchandise-margin management, global sourcing and supply-chain disruptions, foreign exchange exposure, cybersecurity and technology risks, and uncertain effects of COVID-19. Gap continued negotiations with landlords over rent suspended during temporary store closures. It reported ordinary-course legal claims, including class actions, but said recorded loss liabilities were not material and it did not expect current actions to materially affect the financial statements. The company was in compliance with applicable ABL covenants and expected to remain compliant for 12 months.
Important facts for investors to verify
- Confirm future sales, comparable-sales trends, and margins against the unusually COVID-affected prior-year comparison.
- Track supply-chain constraints, inventory levels, promotional activity, and their effects on gross margin and cash flow.
- Monitor execution and costs of the European review and North American Gap/Banana Republic store-closure plans.
- Assess liquidity, debt service, lease obligations, and covenant compliance alongside the announced dividend and remaining share-repurchase authorization.
- Review the transition to the Barclays/Mastercard card program and any resulting changes to credit-card-related revenue or cash flows.