Gap Cuts Outlook for 2021 as Supply-Chain Woes Erode Sales

(Bloomberg) -- Gap Inc. lowered its projection for 2021 sales and profit as supply-chain bottlenecks led to lost sales and higher expenses. The shares fell in late trading.  

• Gap now sees revenue growing about 20% for the full year -- down from its previous projection of a 30% gain. Analysts had projected revenue to be 28% higher this year, according to estimates compiled by Bloomberg.
• The owner of the Old Navy and Banana Republic brands also slashed its profit outlook, citing “an estimated $550 to $650 million of lost sales from supply-chain constraints on available inventory, as well as approximately $450 million in total air freight expense for the year.”
• See more details.

Key Insights 

• The outlook, released in tandem with quarterly results, reinforces the challenging outlook that retailers face as demand stays robust. “While we entered the third quarter with growing momentum, acute supply-chain headwinds affected our ability to fully meet strong customer demand,” Chief Executive Officer Sonia Syngal said in a statement.
• Like many retailers, Gap is using air freight and diversifying its use of ports in order to overcome shipping delays. The company said it manufactures about 30% of its merchandise in Vietnam, a country that saw extended factory shutdowns in recent months, resulting in production slowdowns. On a call with analysts, executives emphasized that supply-chain mitigation efforts were “transitory.”
• In spite of the higher costs, Gap was able to beat analyst estimates for gross margin, which is a measure of profitability. The San Francisco-based company said its gross margin of 42.1% in the third quarter benefited from a transition to a partnership model for its European business. Gap also cited an improvement in rent, occupancy and depreciation costs -- part of the company’s efforts to reduce its store count.
• In response to the supply-chain logjams, Gap said it has added longer timelines into its business plan for the coming year.
• Third-quarter sales totaled $3.9 billion, down 1% from two years earlier and below analysts’ estimate of $4.4 billion. Given the pandemic disruption of 2020, Gap is choosing to compare many of its financial metrics, such as the key gauge of same-store sales, to 2019.

Market Reaction 

• The shares fell as much as 19% in after-market trading in New York. The stock has risen 16% this year through Tuesday’s close.

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