Dive Brief:

• Gap Inc. on Thursday said it will close yet more Gap and Banana Republic stores for a net total this year of 225, and more planned for 2021. Among them is the company’s San Francisco flagship. Second quarter store comps, which reflects online sales and sales days in stores that have reopened, rose 13%.

• The news comes as the apparel retailer bested analyst expectations with month-over-month sales improvements. Second quarter net sales fell 18% year over year to $3.3 billion, with sales at Gap down 28%, Old Navy down 5%, Banana Republic down 52% and Athleta up 6%. 

• Pandemic-related store closures hurt sales in the quarter, though e-commerce nearly doubled year over year and 90% of the fleet has reopened as of Aug. 1, according to a company press release. The company swung to a net loss of $62 million from $168 million in net income a year ago.

Dive Insight:

Under new management, Gap Inc. is employing a no-nonsense approach to its portfolio. Years of lackluster results from its namesake and Banana Republic are having consequences now.

The announcement earlier this week that Gap's flagship will shut down for good is a symbol of the attitude repeatedly expressed by CEO Sonia Syngal and CFO Katrina O’Connell since their arrival last year — that any banner must re-earn its place.

While the pandemic hurt sales by closing stores and tempering demand, it also provided some sales opportunity, as the company sold about $130 million worth of masks in the quarter. Speaking to analysts Thursday, according to a Motley Fool transcript, Syngal credited a number one Google search ranking and "an aggressive B2B business launch" for those sales. 

E-commerce was a standout for all the company's brands, bringing in 3.5 million new customers, representing more than 165% in online customer acquisition, per the release. But the channel was costly: Gross margin declined 380 basis points year over year to 35.1% due to "increased shipping expense as online sales grew and the company leveraged its stores to fulfill strong online demand," per the release. 

The assertive store closures at Gap and Banana Republic represent "a good step in the right direction strategically," according to Credit Suisse analysts led by Michael Binetti. But the strategy for those brands beyond the closures or even Gap's recently announced Yeezy partnership remains unclear, they said in emailed comments. Moreover, profits at Old Navy, which specializes in low-priced apparel, could get hit hard if e-commerce, and its expensive fulfillment, continues to grow there, they warned.

The brand that stands out these days is Athleta, already a promising banner in a market favorable to its athleisure assortment, which has only grown during the pandemic as many work from home. Credit Suisse called it a $1 billion brand "that we do believe has strong strategic value." But any potential to spin it off was dismissed by Syngal Thursday. Last year the company attempted a spinoff of Old Navy, but cancelled those plans as the brand faltered and investors grew nervous.

"The management team and our Board are highly engaged and attuned to investor considerations and looking at the portfolio considering all opportunities for value creation," she said. "What I will say is that what's different about us today is that we are a leaner, faster, more focused Gap Inc. than prior. And I have never felt stronger than I do now in this moment that these four brands have the right to grow and that we expect to see tremendous potential within the portfolio. That's what we're focused on, and we're focused on unlocking that value through strong execution, not divesting it."