A Gap store in New York, August 2, 2020.

Scott Mlyn | CNBC

Gap Inc. Shares fell Tuesday after the company slashed its full-year outlook, falling short of fiscal third quarter results as Covid-related factory closings resulted in significant product delays in the quarter.

The stock lost about 16% on the news in extended trade recently, after rising about 16% year-to-date.

“We started the third quarter with increasing momentum, but acute headwinds in the supply chain hampered our ability to fully meet strong customer demand,” said Chief Executive Sonia Syngal in a press release.

Gap said it had invested in air freight to alleviate some of the challenges of port congestion over the holidays. However, this also means additional expenses that will affect profits in the short term.

For the three-month period ended October 30, Gap has performed compared to analyst expectations using refinitive data:

  • Earnings per share: 27 cents adjusted vs. 50 cents expected
  • Revenue: $ 3.94 billion versus $ 4.44 billion expected

Gap said it had risen to a net loss of $ 152 million, or 40 cents per share, on net income of $ 95 million, or 25 cents per share, the previous year.

Without an item, she earned 27 cents per share, according to Refinitiv, less than the 50 cents analysts were looking for.

Revenue decreased slightly from $ 3.99 billion a year ago to $ 3.94 billion. That fell short of expectations of $ 4.44 billion.

Supply chain problems will persist

CFO Katrina O’Connell said the backlog in US ports worsened significantly in the second half of this year, causing up to three consecutive weeks of unforeseen delays in Gap’s fall products.

While some of the disruptions are temporary, the challenges are likely to continue until early next year, she said.

Gap’s inventory levels decreased 1% year over year at the end of the third quarter and were unchanged from 2019. Gap expects inventory levels to grow in high single digits in the fourth quarter compared to last year.

“The situation in the supply chain remains volatile,” said O’Connell. “Newly opened Vietnam factories are on vacation.”

Lost revenue hurt Old Navy the most

Other clothing retailers including Victoria’s secret and Abercrombie & Fitchwho rely on Asia for production also said factory closures in Vietnam and clogged ports have resulted in their shelves not being as full as they would have liked in recent weeks.

Gap now expects full-year revenue growth of around 20%, which is less than the previous forecast of around 30%. Analysts surveyed by Refinitiv had expected an increase of 28.4% compared to the previous year.

Gap’s adjusted full year earnings expectations have been lowered to a range of $ 1.25 to $ 1.40 per share, from a previous range of $ 2.10 to $ 2.25 per share. Analysts had expected Gap to make $ 2.20 per share, Refinitiv said.

The company said its revised outlook includes about $ 550 million to $ 650 million in lost revenue due to supply chain restrictions and about $ 450 million in air freight costs for the year.

Old Navy has been disproportionately affected by supply chain delays, especially in the women’s range, Gap said. As a result, sales in the same stores decreased 9% year-over-year, but remained up 6% compared to 2019.

This is especially bad news for the company considering Old Navy has been a major growth engine for Gap over the past few quarters. It has made significant investments in Old Navy, including Revision of the plus-size clothing range. So slowing down at Old Navy is putting a bigger strain on the whole business.

For the Gap brand of the same name, sales in the same store increased by 7% compared to the previous year and by 3% compared to 2019. According to Syngal, the ongoing store closings have helped the brand experience healthier growth. Gap is also focusing on trimming back goods in the stores to keep the locations “brighter and brighter,” she said.

At Banana Republic, which is more focused on selling women’s workwear, sales in the same store increased 28% year over year and decreased 10% on a two-year basis.

Sales in the same store at Athleta, Gap’s rival Lululemon and Nike for women, increased by 2% compared to the previous year and increased by 41% compared to 2019.

A bright spot in Gap’s report was the apparel maker’s ability to increase its product prices. Gross margins were 42.1% for the third quarter, Gap’s highest rate for that period in 10 years. The company said the discount rate in the third quarter was also its lowest in five years.

The company is counting on that too a connection with rapper Kanye West’s Yeezy line will increase sales and attract new customers. On a phone call, Syngal said a Yeezy hoodie made the most sales in a day, online from a single item in Gap’s history.

Find Gap’s full earnings release here.