Gap Inc. is in talks with its store landlords and is paying “what we consider fair rent” as the apparel retailer opens back up amid easing COVID-19 restrictions, CEO Sonia Syngal said in an interview.
The company, which reported a deep sales decline for the quarter ended May 2, has opened more than 1,500 stores of its 2,600 stores in North America, saying its reboot after months of restrictions on nonessential business is “ahead of plan.”
“What we’re looking to do primarily is create a fair and win-win relationship with our landlords,” Syngal said. “We want to win together but we know there’s a lot of uncertainty. So, what we want is the right structure to have a shared accountability and a shared opportunity as we move forward.”
She added that Gap has reached agreements with hundreds of landlords who “are recognizing that the world has changed.” The rest are ongoing negotiations.
“As we open stores, we are committed and we are paying fair rent—what we consider fair rent,” Syngal said.
One landlord, Simon Property Group Inc., sued the retailer this week, saying Gap failed to pay $65.9 million in rent in recent months. Last month, a Manhattan landlord filed a lawsuit against Gap for not paying rent at a store near New York City’s Times Square.
In a call with analysts on Thursday, chief financial officer Katrina O’Connell said the company has stores where the rents need to be renegotiated and is using this “unique opportunity” to engage in talks.
The retail company announced last month that it had stopped paying rent for closed stores in order to conserve cash as sales fell to a fraction of pre-COVID-19 levels. Throughout the retail industry, tenants have withheld rent to help mitigate costs as they navigate the pandemic.
Gap has been hit hard by mandatory closures of nonessential retailers and the sudden swing in consumer spending away from discretionary goods like apparel. The shares have fallen 31% this year —more than the S&P 500 Index.
Gap’s new leader
Syngal took the reins of the company in March—just as much of the U.S. went under stay-at-home orders due to the coronavirus pandemic. She went into the position with a transformation plan in place after Gap’s sales had floundered under her predecessor, Art Peck. But the pandemic immediately overhauled the agenda.
Before the pandemic, about 25% of Gap Inc.’s U.S. sales were online and has had a “meaningful acceleration” during the pandemic, Syngal said without revealing more.
“During the quarter, we saw a 40% increase in customers migrating from retail-only to multi-channel versus last year, and we all know how valuable the multi-channel customer is,” she told investors, according to a Seeking Alpha transcript.
Across all of its brands, online sales increased 40% year over year in April, and 100% in May. For its 2020 fiscal first quarter ended May 2, online sales grew 13%.
Total sales, however, decreased 43% in the quarter to $2.11 billion from $3.71 billion in Q1 2019. It also took a net loss of $932.0 million compared with net income of $227.0 million in the year-ago quarter.
Syngal said that sales at reopened stores are currently at 70% of what they were at this time last year and improvement is building as consumers open their wallets again. The company is betting on curbside pickup of merchandise at many stores. At Old Navy, it is shipping online orders from 2,100 stores and has curbside at 500 stores. It launched curbside pickup during the COVID-19 crisis.
“We are tracking openings very, very closely,” she said, adding that stores in New York would add curbside pickup as soon as it’s safe to do so. The broader challenge, she said, is responding to different state and local rules and timelines as the U.S. economy wheezes back to life.
“It takes a lot of interpretation, and even today every county has a different set of requirements,” Syngal said. “We wish there was a little bit more alignment on it.”
Gap says 70% of its stores are in outlet and off-mall locations. “We expect customers to gravitate toward these locations as they consider health and safety, an opportunity for us going forward,” Syngal said.
O’Connell told investors on Thursday that the company has cut its headcount by 15% to preserve liquidity and the company is using a “pack-and-hold” inventory strategy. This means Gap will store summer and fall products that it’s unable to sell in 2020 until the right season next year. She said this will help the company preserve margin.
Globally for Gap brands:
- Old Navy’s global net sales were down 42% year over year for the quarter, store sales down 60% and online sales up 20%.
- Gap’s global net sales were down 50% year over year, with store sales down 64% and online sales down 5%.
- Banana Republic’s global net sales were down 47% year over year, store sales down 61% and online sales down 2%. The brand says that the move to consumers wearing more casual clothing during stay-at-home orders has hurt Banana Republic.
- Athleta’s net sales were down 8%, store sales down 50% and online sales up 49%.