Gap to Slash Capital Spend by Half, Focus Investments on Technology and Supply Chain

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Gap to Slash Capital Spend by Half, Focus Investments on Technology and Supply Chain

By Jamie Grill-Goodman - 06/05/2020
Net sales and stores sales continued to reflect material declines in May as a result of closures, but Gap saw over 100% growth in online sales during the month.

Gap Inc. reported a huge loss as sales fell amid temporary store closures during the pandemic and CEO Sonia Syngal said the apparel retailer will slash its capital spend by half.

The retailer’s first quarter 2020 net sales were down 43% year-over-year, as momentum in the first 35 days of the quarter, ended May 2, was more than offset by drop in demand after temporary store closures beginning in mid-March.  

Gap reported a net loss of $932 million, or $2.51 per share, for the quarter, compared with a profit of $227 million, or $0.60 a share, in the year-ago period.

However, the retailer’s Q1 online sales increased 13% year-over-year and by 100% year-over-year in May.

“Our teams' ability to pivot quickly and lean into our strong online business resulted in an encouraging 40% online sales growth in April,” Syngal said in a statement.  

In the retailer’s earnings call she noted, “as soon as we turned our shift from store and as we started to fully activate and lean into our online business we saw sequential week-over-week, month-over-month growth.”

While the online business was boosted, Syngal said the store closures resulted in around 75% of the retailer’s demand being disrupted. 

The company plans to reduce its capital expenditures for the fiscal year by approximately 50%, slashing capital spending to around $300 million for fiscal year 2020, which includes about $30 million of expansion costs related to its Ohio distribution center.

Most of the reduction comes from investment in stores with an eye toward the minimum level of capital necessary to operate the business,” EVP & CFO Katrina O'Connell said. “Of the remaining capital spending in fiscal year 2020, the majority is oriented toward technology and supply chain investments that support changing customer shopping habits, including the expansion of our Ohio distribution center, critical work that began last year to double the capacity supporting e-commerce demand, a valuable benefit with a dramatic rise in online shopping.

The retailer will continue its fleet rationalization plans, Syngal said, to operate a “smaller, healthier Gap.”

Simon Property Group, the biggest mall owner in the U.S., is suing Gap Inc. for its alleged failure to pay more than $65.9 million in rent and other charges due during the COVID-19 crisis. In April, Gap said in a Securities and Exchange filing that it had stopped paying rent starting in April and was in discussions to renegotiate or, in some cases, even terminate leases and close stores entirely. 

When asked about rents during the earnings call, O'Connell said, “we still believe that a small healthy fleet with good rent economics is incredibly important to our business model as we look to maximize both our strongly located fleet combined with our strong omnichannel and e-commerce. That said, we do have some stores that need to be renegotiated from a rent structure standpoint.”

“We're deep in those negotiations right now, but we do look forward to emerging from this with a profitable fleet that we think well complements our online business,” she continued.