Gap Plunges as Weak Inventory Costs Sales, Brings Cut in Guidance

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Gap Plunges as Weak Inventory Costs Sales, Brings Cut in Guidance

By Dhirendra Tripathi – Gap stock (NYSE: GPS ) plummeted 21% in Wednesday’s premarket trading as supply chain issues meant that sales at the retailer fell in the third quarter while costs rose, ensuring the company fell short of estimates.

The owner of Banana Republic and Old Navy cut its sales forecast for the year in response to extended and ongoing supply chain issues.

Net sales fell 1% year-on-year to $3.94 billion as the company’s stores ran out of inventory owing to factories being shut in Vietnam, its key base for supplies. The pandemic swept the Asian country earlier in the year, causing the government to order lengthy factory closures to contain the Covid-19 virus.

According to the company’s estimates, it may have lost $300 million in sales during the quarter due to inventory constraints. For the full year, the damage could be as much as $650 million, it said.

To overcome lack of inventory and to bypass congestion at ports, the company is resorting to air freight to carry clothes and accessories faster, just in time for the holiday season. This has raised its transportation costs. Operating expenses, as a percentage of sales, were thus higher by 140 basis points at around 38%. One basis point is one-hundredth of a percent.

“We believe the right thing to do is compete in the holiday season to have the right stock across all four of our brands, and that’s what we’re doing,” Gap CEO Sonia Syngal told CNBC. Athleta is the fourth brand in the portfolio.

Online sales grew and comprised 38% of total revenue, the company said.

The company now expects annual sales to grow 20% compared to the 30% it estimated earlier. Adjusted operating margin is also seen taking a hit of 250 basis points from the previous forecast and end at about 5% for the year.

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