Gap’s $300M Inventory Stockout Loss Big Red Flag for Retail

Mind the gap, as they say.

Or in this case, within retail, and looking out to the holiday season and beyond … mind Gap’s warning signs.

This week, the apparel giant said supply chain issues have hit the top line, while boosting costs.

Not the combination that any firm desires, no matter the vertical in which they operate. The pain is especially acute for those firms navigating inventory pressures within retail. After all, without the inventory on hand to meet demand in the all-important holiday season, it stands to reason that frustrated shoppers will go elsewhere for what they want.

At this writing, Gap shares were trading down 22%, on the heels of an earnings report that found its top line shrank by 1% to $3.9 billion, and inventory remains an issue.

The company estimated that it had lost $300 million in the quarter due to inventory stockouts. Lack of inventory on hand could cost the company $500 million for the year.

Much of the pressure can be traced to the fact that at least part of Gap’s supply chain is dependent on Vietnam, itself buffeted by the pandemic. Abercrombie’s results announced this week also were impacted by Vietnam, and management noted on the earnings call that factory closures and increased transit times tied to that country impacted gross profit (and of course hit inventory availability).

Transport Costs an Issue 

At the same time, Gap said, transportation costs (freight) increased, thus hitting margins.

Read here: Gap Leans on Multi-Brand Approach to Weather Supply Chain Issues

Now: Online sales are 38% of Gap’s overall business, which leads us to ponder the impact that the company’s brick-and-mortar locations are seeing. In presentation materials that accompanied earnings, the company noted that strip and lifestyle centers were 40% of sales; indoor mall locations were 18% of sales and street locations were 4% of sales. The U.S. is 84% of the company’s business. So, as foot traffic goes, particularly in the U.S., so goes Gap’s fortunes, at least near term. General merchandise firms like Target and Walmart have noted that apparel sales were up double-digit percentage points — it’s possible that there’s been at least some shift in terms of inbound traffic.

Supply chain woes are not isolated to Gap. Nordstrom has said that supply chain frictions have proved to be headwinds, too. The stock is down 28% in intraday trading. Drilling down into the impact here, the company has said Nordstrom Rack sales are actually 8% below pre-pandemic levels (which may be a competitive issue as much as supply chain issue).

Huge firms like Walmart (and of course Amazon) have the ability to navigate through at least some of these challenges. They own infrastructure and have scale enough to get inventory onto the shelves (even weathering at least some of the margin pressures). For many of the other players in retail, competing for foot (and online) traffic in a world where inventory also becomes a competition (who has it, who doesn’t), it may be a long wait until things get back to normal. In the meantime, the 2021 holiday season may be one that (some) merchants would like to have in the rearview mirror.