Gap (GPS) hopes to see a favorable recovery by the second half of 2021

Shares of Gap Inc. (NYSE: GPS) were up 5.8% in afternoon hours on Friday. The stock has gained 103% over the past 12 months. Gap reported mixed results for the fourth quarter of 2020 a day ago with earnings exceeding estimates while revenues fell short of expectations.

In Q4, revenues fell 5% year-over-year to $4.4 billion due to store closures and lower traffic resulting from the pandemic. Some of these challenges are expected to persist during the first half of 2021 but as vaccines are distributed and people start venturing out, the company anticipates seeing a recovery during the second half of the year.

Brand performance

During the fourth quarter, sales in the Old Navy and Athleta brands rose 5% and 29% respectively, year-over-year helped by growth in online sales as well as strong performance in the casual and active categories. Together they made up 63% of company sales in 2020 and remain on track to reach the company’s target of 70% by the end of 2023.

In 2020, Gap witnessed strong performance in its Active, Fleece and Sleep categories as customers preferred more casual clothing while staying at home. The Athleta brand, which is a high margin business, benefited from the strong growth in the active category and continued to gain market share through the year. Building on this momentum, Athleta launched two new products, sleepwear and inclusive sizing, which are expected to be major growth drivers in 2021.

Digital

In Q4, Gap’s online sales grew 49% versus last year, comprising 46% of net sales. For full-year 2020, the online channel delivered $6 billion in sales, reflecting a YoY growth of 54%, and comprising 45% of total company sales, up from 25% last year.

Digital forms a key part of Gap’s growth strategy and the company is working to increase its digital penetration to 50% by 2023. Mobile is another important channel which currently accounts for over 50% of traffic and 75% of annual sales. Gap is working on improving its capabilities across these channels in order to meet the growing demand of online shopping.

Store fleet

As part of its fleet rationalization strategy, Gap closed 228 net Gap and Banana Republic stores globally in 2020, ahead of its target of 225 stores. The company plans to close 100 Gap and Banana Republic stores globally in 2021, with 75 in North America alone. Gap expects to open 30-40 Old Navy stores and 20-30 Athleta stores this year as part of its efforts to create a more profitable store fleet. By the end of 2023, the company plans to close 350 Gap and Banana Republic stores in North America.

Outlook

For 2021, Gap expects net sales to grow in the mid-to-high teens compared to 2020 and EPS to range between $1.20-1.35. The company expects to spend approx. $800 million in capital expenditures during the year.

Click here to read the full transcript of Gap’s Q4 2020 earnings conference call