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What happened

Shares of Gap (NYSE:GPS) plunged 24% on Wednesday after the retailer’s third-quarter results fell well short of investors’ expectations.

So what

Gap — which owns Old Navy, Banana Republic, and Athleta, in addition to its namesake brand — saw sales slip 1% year over year to $3.9 billion. Coronavirus-related supply chain disruptions took a heavy toll on the company’s ability to source inventory for its stores. 

Old Navy was hit particularly hard. The clothing and accessories chain’s comparable sales fell 9%. “While we entered the third quarter with growing momentum, acute supply chain headwinds affected our ability to fully meet strong customer demand,” CEO Sonia Syngal said in a statement.

Investors sold off Gap’s shares on Wednesday. Image source: Getty Images.

To circumvent congested ports, Gap chose to ship a larger portion of its merchandise via air freight services. These more expensive shipping options weighed on its profits.

All told, Gap’s adjusted net income increased 7% to $102 million, or $0.27 per share. That was only about half of the $0.50 per share in earnings analysts had expected. 

Now what

During the company’s earnings call, CFO Katrina O’Connell warned investors that Gap’s supply chain troubles might persist into 2022. She said Gap could lose sales of as much as $650 million due to inventory constraints while incurring roughly $450 million in total air freight expenses.

To account for this, Gap cut its full-year revenue and profit forecast. Management now expects net sales growth of 20%, down from its previous estimate of 30%. The company also guided for adjusted per-share profits of $1.25 to $1.40, down from $2.10 to $2.25.  

“While our mitigation efforts are driving significant transitory costs, we view these as investments in preserving market share and driving overall health and relevance for our brands,” O’Connell said.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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