Dive Brief:

• In a report that highlighted the stark differences among its brands, Gap Inc. on Thursday said fourth quarter net sales fell 5% to $4.4 billion. Online sales rose 49% year over year and as a percentage of net sales rose more than 17 points to 46%, while store sales fell 28% due to both pandemic-related and permanent closures.

• Comps in the period (digital sales plus open stores) were flat. Old Navy net sales rose 5%, with comps up 7%, while Athleta net sales rose 29%, with comps up 26%. By contrast, Gap net sales fell 19%, with comps down 6%, and Banana Republic net sales fell 27%, with comps down 22%. 

• The company swung into the black, reaching net income of $234 million, from a $184 million net loss in the year-ago quarter, and operating income of $134 million, from last year's $245 million operating loss.

Dive Insight:

There appear to be winners and losers in Gap Inc.'s portfolio, with the company depending on Old Navy and smaller Athleta for growth.

Meanwhile, its underperforming brands, Gap and Banana Republic, face divergent prospects post-pandemic. Banana Republic may have a murky future, but it's poised for some level of recovery that will allow it to rebuild, according to GlobalData Managing Director Neil Saunders. Not so much for namesake Gap.

"The Gap brand will also see a return of customers, but without some form of reinvention it will revert to previous struggles which saw it lose shoppers, market share, and sales," he said in emailed comments. "Gap is a brand that has lost relevance and the company has not set out a very convincing strategy to reimagine it."

Meanwhile, Old Navy has returned to its savior status. For a while, the brand had uncharacteristically failed to prop up the company's performance, just as it sought to spin it off, forcing it to nix those plans. Old Navy's two major attractions, price point and casual style, were made for a pandemic year, and the company said that growth there continued despite the restrictions. But it also resonates in more stable times, Saunders said, adding that Old Navy could hit its $10 billion sales target in two years or so. Some analysts expected more, however.

"Despite those positives, we thought key growth drivers Old Navy & Athleta could have delivered better sales trends in a quarter that was otherwise solid for brands with good omnichannel capabilities," CreditSuisse analysts let by Michael Binetti said in emailed comments, indicating they "were still disheartened" that marketing expenditures were up $66 million year over year in the quarter, but only drove flat comps.

Executives at the apparel conglomerate during a conference call Thursday sounded upbeat about 2021, and joined others in their expectations that the post-pandemic period promises pent-up demand that will have consumers buying new clothes. The Yeezy collab with Kanye West, announced last year, is on track to be ready toward the end of the year's first half, they said.

"While comps missed expectations, we were encouraged by a return to positive comps for Gap brand in [North] America (even before the Yeezy launch in 2Q)," Binetti said.

The company is starting to save a lot of money on its stores, as it continues to permanently close more locations and drive down rents on many of those staying open. That already helped margins in the quarter. Gross margin was expanded by 190 basis points year over year to 37.7%, "well ahead of the company's prior outlook of being flat versus the year-ago quarter," per the release. "Rent, occupancy and depreciation savings leveraged 400 basis points, as online sales increased and as the company continued to close unprofitable stores, favorably settle lease liabilities and derive benefit from rent negotiations."

Merchandise margins were squeezed by 210 basis points, however, with higher shipping costs taking out 300 basis points, due to increased online sales and carrier surcharges, per the release. "There were also increases in freight costs that put pressure on the product margin, but despite these increases product margin expanded due to lower promotional activities," the company said.