Is air freight worth the cost to Gap?
Gap last week found itself defending its plan to air freight 35 percent of its holiday range and absorb $450 million in related costs to help offset supply chain challenges.
Gap’s shares saw a 24 percent one day plunge last Wednesday after the retailer slashed its full year earnings and sales guidance.
“We chose airfreight over ocean vessel for a significant portion of our assortment, taking on extreme transitory cost,” said Gap CEO Sonia Syngal last week on the retailer’s third-quarter analyst call. “We’re disappointed in the short-term impact on earnings, but we made the choice to invest in our customer promise and build loyalty that will help sustain growth over the long term.”
The parent of Gap, Old Navy, Banana Republic and Athleta also reduced its growth expectations for the full year to 20 percent from 30 percent. Management now expects supply chain disruptions to cause $550 million to $650 million in lost sales.
Gap blamed its downward revision on pandemic-related factory closures in Vietnam, which produces 30 percent of the company’s product. The shutdowns lasted two-and-a-half months, well beyond Gap’s expectations given other re-openings. Average on-hand inventory in Q3 was 11 percent below the third quarter of 2019.
Katrina O’Connell, CFO, told analysts that being a vertically-integrated retailer caused the shutdowns to impact Gap sooner than retailers relying on wholesalers for product. The backlog at U.S. ports also “deteriorated meaningfully” from the first half of the year, she said.
Gap rerouted a modest portion of inventory to East Coast ports to bypass West Coast port congestion. The company said it is taking some long-term steps to reduce excessive air freight, including digitizing product creation to speed turnarounds, leveraging more multinational vendors and using artificial intelligence to drive inventory management.
In the near term, however, Ms. Syngal said air freight investments are necessary to build on the momentum being seen across the company’s banners.
“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,” Ms. Syngal told CNBC last week.
“I would much rather have a supply problem than a demand problem,” she added.
- Gap Inc. Reports Third Quarter Results – Gap Inc.
- Gap (GPS) Q3 2021 Earnings Call Transcript – The Motley Fool
- Gap CEO defends air freight investments despite margin hit, says it’s about competing for holidays – CNBC
- Gap’s Sales Suffer From Supply-Chain Problems Before Holidays – The Wall Street Journal
DISCUSSION QUESTIONS: Do you applaud Gap’s move to accelerate investments in air freight to support holiday demand? What are the key factors that go into decisions to invest in air freight and other steps to expedite delivery at the expense of margins?