Why Gap (GPS) should focus more on its online business going forward

Like most of its retail peers, Gap Inc. (NYSE: GPS) took a hit to its sales from store closures due to the coronavirus pandemic. On the flip side, the company’s digital business witnessed a strong uptick as more people moved to online shopping.

Last week, the San Francisco-based retailer reported its first quarter 2020 results, registering a 43% year-over-year decline in net sales due to the closure of around 90% of its global store fleet in mid-March. Store sales fell 61% year-over-year during the period.

Meanwhile, the company’s online sales grew 13% year-over-year in the first quarter with the momentum continuing into the second quarter. From April, online sales picked up pace with each week, delivering 40% growth in that month, followed by over 100% growth in May. In fiscal year 2019, online sales comprised around 25% of Gap’s sales, amounting to $4 billion.  

“Our teams’ ability to pivot quickly and lean into our strong online business resulted in an encouraging 40% online sales growth in April. While net sales and stores sales continued to reflect material declines in May as a result of closures, we saw over 100% growth in online sales during the month. This online momentum, enabled by new omni-capabilities that have expanded the way customers can shop with us, leaves us well-positioned to fuel our brands going forward.” – Sonia Syngal, President and CEO

This brings us to the point that perhaps it is time that Gap pays more attention to its online business while making some strategic decisions on its stores to drive future growth.

Store challenges

Gap took a heavy hit from the store closures during the health crisis, which caused approx. 75% of its demand to be disrupted. The company significantly exceeded its plan to reopen 800 stores by the end of May with over 1,500 stores having been reopened to date. Despite this, net sales and store sales suffered material declines due to closures and demand shock.

Even as businesses slowly limped back to normalcy in the wake of the pandemic, the corporate world took another blow from the protests in the nation with several retailers suffering damages to their stores. Gap too bore the brunt with 20 of its stores sustaining heavy damage.

The company is also in negotiations with its landlords with regards to feasible rent structures which are essential for store profitability. Despite the healthy trends in online business, Gap still needs its stores to support its fulfillment options such as buy online, pickup in store. However, challenges like these will make it necessary for the company to evaluate its store fleet and resort to closing unprofitable locations.

Another factor is costs. Over the coming months, Gap expects its store operating costs to increase as stores reopen. These expenses are expected to rise as the necessary healthy and safety measures are implemented across stores. Add to this the costs of repairs from the aforementioned damages and the number will see yet another increase.

Online growth

While the company saw net and store sales decline across all its brands, online sales results were mixed in the first quarter. Online sales increased in the Old Navy Global and Athleta brands, growing 20% and 49%, respectively during the period.

The company’s decision to not spin off Old Navy appears to have been the right one with the brand seeing a meaningful pickup in online sales during the outbreak. Old Navy benefited from the sales of kids and baby stuff while Athleta benefited from strong athleisure trends. In general, the company saw strong demand in active and loungewear as people stayed at home.

Gap expects its Old Navy brand to benefit from its off-mall locations which are more likely to attract shoppers as opposed to mall locations. The company is also monitoring the willingness of customers to start shopping from stores.

Looking ahead, it is likely there might be some hesitation in people coming back to stores for shopping due to both the strict protocols that have to be followed along with an unwillingness to leave the convenience that online shopping provides. In light of these trends, it would be prudent for Gap to focus on ironing out the kinks in its online business in order to drive maximum growth from this channel.

Click here to read the full transcript of Gap Q1 2020 earnings call