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 per cent for the full year -- down from its previous projection of a 30 per cent gain. Analysts had projected revenue to be 28 per cent 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 US$550 to US$650 million of lost sales from supply-chain constraints on available inventory, as well as approximately US$450 million in total air freight expense for the year.”
 

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 per cent 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 per cent 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 US$3.9 billion, down 1 per cent from two years earlier and below analysts’ estimate of US$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 per cent in after-market trading in New York. The stock has risen 16 per cent this year through Tuesday’s close.