Katrina O'Connell
Chief Financial Officer at GAP
Thank you, Bobby, and thanks, everyone, for joining us this afternoon. As Bobby just discussed, we have four strong brands and leverage in the portfolio that will enable us to compete and win. However, the current execution challenges, combined with our volatile operating environment, are requiring us to move swiftly to manage the levers in our control and take the actions necessary to drive immediate and long-term improvements across our entire business.
These actions include: one, sequentially reducing inventory through the second half of the year, including the impairment of unproductive inventory as well as reducing future receipts; two, rebalancing our assortments to better meet changing consumer needs, aggressively manage overhead costs and the reevaluation of our technology and marketing investments in order to better position our model for the long term; and finally, fortifying our balance sheet in the face of uncertain macro trends and near-term execution headwinds. I will get into more details on these actions in a moment.
So let me start with our second quarter results as well as key drivers of our first half performance and share some color as we look to the remainder of the year. Starting with sales, total company sales of $3.86 billion were down 8% versus last year, or 7% on a constant currency basis. Coming off of peak inflation and the higher gas prices, particularly impacting the low-income consumer in June, we have seen an improvement in sales trends in July and into August, consistent with many other retailers. Comparable sales were down 10%, a sequential improvement from the negative 14% comp reported in the first quarter, which was negatively impacted by the lapping of stimulus in the prior year.
Store sales declined 10% from the prior year. As we look to the remainder of the year, we anticipate opening 30 to 40 Athleta stores, 20 to 30 Old Navy stores and continue to expect to close about 50 Gap and Banana Republic stores this year, bringing us to approximately 85% of our goal of closing 350 stores in North America by the end of fiscal 2023. Online sales declined 6% versus last year and represented 34% of total sales in the quarter. Compared to pre-pandemic levels in 2019, online sales increased 55%. Year-to-date, total sales were down 11% compared to last year and were down 5% relative to pre-pandemic levels in 2019.
While we believe strongly in our ability to maintain core category leadership in the back half of the year, we are taking a more conservative posture as it relates to our sales outlook as we read the consumer response to the many changes we've made to product assortments, which are just taking hold and considering the uncertain macro environment, particularly the low-income consumer. Let me now provide sales color by brand, starting with Old Navy. Sales in the second quarter declined 13% versus last year to $2.1 billion. Relative to 2019, Old Navy sales increased 6%.
In the second quarter, Old Navy comparable sales were down 15%, representing a sequential improvement from the negative 22% comp last quarter. The year-over-year declines at Old Navy stemmed from continued previously discussed size and assortment imbalances. While we believe Old Navy's value positioning should enable it to attract a wide range of consumers, the brand is not immune to the pullback in spending by the lower income consumer, which we believe may all come out on some of the softness.
The Old Navy team remains focused on adding balance and relevance to the assortment with broader end use, particularly dresses, pants, denim and woven tops, and improved fashion choices, which we believe will begin to see this fall and even more into holiday. We continue to lean into maintaining our leadership positions in categories we are known for, like denim, active and kids and baby. In addition, we remain on track towards optimizing our extended size, BODEQUALITY offering in stores to better match demand late in the third quarter. We also remain confident following supply chain disruption and inventory delays that our core sizes will be back in stock for late fall.
Turning to Gap brand; global sales in the quarter declined 10% versus last year to $881 million. Global comparable sales were down 7%, an improvement from the negative 11% comp reported last quarter. North America comparable sales were down 10%, a slight sequential improvement from 11% in the first quarter. Gap brand remained impacted by casual category softness, particularly mid-tops and casual shorts, while more relevant categories like dresses and pants showed better results given the shift in consumer preferences. The team is focused on fixing the category mix imbalances in fall and holiday.
In addition, Gap outlet demand is experiencing near-term softness, which we attribute to continued pullback from the lower-income consumer. Banana Republic second quarter sales grew 9% year-over-year to $539 million. Comparable sales were up 8% during the quarter. Banana Republic maintains its focus on quality product, differentiated experiences and continues to capitalize on the shift in consumer trends while realizing continued benefits since last year's brand relaunch. Athleta sales grew 1% to $344 million, with comparable sales down 8%.
Athleta posted an increase of over 37% in sales compared to 2019 pre-pandemic levels, reflecting the brand's continued progress in driving awareness and establishing authority in the women's active and wellness category. As we stated last quarter, we are focused on ensuring that Athleta strikes the right balance of active and lifestyle in its assortment mix to best meet the evolving consumer demand, which have shifted from athleisure towards worth and occasion in the short term. While there has been a modest slowdown in the women's at laser category, and Athleta is maintaining share in that market, we expect market share gains.
We believe we had some print and color misses in our summer assortment, which drove some of the softness in the quarter. The team has pivoted quickly to deliver a more cohesive color story across its assortment, including more elevated prints, and a higher penetration of on-trend styles this fall, which will better position the brand in the back half. We are confident that the brand will capitalize on the continued secular shifts in growth in the health and wellness categories broadly, and drive outsized growth over the long term. Now turning to gross margin; reported gross margin in the second quarter was 34.5%.
During the quarter, we wrote off $58 million of unproductive inventory, primarily styles and sizes at Old Navy. We expect that clearing's inventory will enable us to drive an improved consumer experience across all channels and better showcase the newness and merchandise that resonates most with our customer, while allowing us to better optimize our margins. Adjusted for the inventory impairment, gross margin was 36%, deleveraging 730 basis points from the prior year. Close to half of the deleverage stems from onetime or macro-related headwinds, while the balance reflects our increased promotional activity resulting from our current inventory challenges and assortment imbalances.
Let me share some more specifics on these factors. First, we continue to navigate inflationary cost headwinds, which we estimate had an approximate 200-basis-point negative impact on margin. Second, consistent with our expectations, we realized an estimated $50 million of incremental airfreight during the quarter, which resulted in approximately 130 basis points of margin deleverage. And third, while we continue to benefit from our fleet restructuring efforts through lower ROD costs, which were below last year on a nominal basis, ROD deleveraged approximately 30 basis points, primarily as a result of the lower sales volume during the quarter. The remaining deleverage of approximately 370 basis points stemmed primarily from higher discounting at Old Navy.
Like so many others in our industry, we are managing through elevated inventory levels as a result of changing demand trends and shifting consumer preferences. Additionally, as you know, we've been navigating through product lateness and product acceptance issues, most notably at Old Navy, which has forced us to increase the level of discounting in an effort to better balance our assortment. Let me quickly frame up the drivers of our first half gross margin in order to contextualize the puts and takes as we look to the back half of the year.
While there are factors in our control, and levers we are pulling to drive improvement, there are also gross margin dynamics where we have substantially less visibility as we look to the back half. First half adjusted gross margin was down 820 basis points year-over-year, driven by an estimated 300 basis points of airfreight deleverage, 220 basis points stemming from higher discounting, roughly 200 basis points of inflationary cost headwinds and roughly 100 basis points of ROD deleverage. As we look to the second half of the year, airfreight expense is expected to normalize, and we will be anniversarying last year's investments, resulting in roughly 400 basis points of leverage.
The roughly 200 basis points of inflationary deleverage is expected to continue, and ROG is expected to be flat or delevered slightly. Where we've seen the most significant variability versus our expectations is in the discount rate. While we are taking actions to rightsize inventory, we are also mindful of the uncertain and increasingly promotional environment clouding our visibility. We entered the third quarter with elevated levels of inventory and expect inventory growth to moderate as we move throughout the year as our actions take hold we reduce receipts and begin to anniversary higher in-transit levels last year.
By spring, we expect to begin to lean into our responsive levers, providing the flexibility to better align inventory levels with demand trends. Now turning to SG&A; in the second quarter, SG&A was $1.36 billion or 35.2% of sales, deleveraging 160 basis points from the prior year, primarily as a result of lower sales volume. Excluding the $35 million charge related to the Old Navy Mexico transition, adjusted SG&A as a percentage of sales deleveraged 120 basis points versus last year's adjusted rate. While we made significant SG&A investments over the last few years to help fuel our future growth opportunities, the current operating environment does dictate a moderation of these investments as well as the implementation of distinct expense savings actions in the near term.
We will begin implementing later in the third quarter a reduction in overhead investments, including a pause on planned hiring and open positions among other actions. In addition, we are reevaluating our investments in marketing and technology. We firmly believe that marketing investments are a key contributor to Brand health and customer acquisition. But in light of the current operating environment, we are looking at specific opportunities to invest more prudently, focusing our spend on the most productive and highest return opportunities.
We also believe there's an opportunity to slow down more meaningfully the pace of our technology and digital platform investments to better optimize our operating profits. We will share more details as we implement these actions, and expect these initiatives to mostly benefit fiscal 2023, and help offset the incentive compensation that will come back into our forecast next year. Reported operating margin in the second quarter was negative 0.7%. On an adjusted basis, excluding the inventory impairment charge and Old Navy Mexico charge, operating margin in the second quarter was 1.7%. Reported EPS during the second quarter was a loss of $0.13.
Adjusted EPS was $0.08, which excludes the inventory impairment and Old Navy Mexico transition charge. The $50 million of estimated transitory airfreight expense in the quarter had a negative $0.10 impact to reported and adjusted EPS. As we look to the third quarter, we continue to expect a net benefit of approximately $85 million from the planned sale of our U.K. DC now that our European partnership model transition is complete. As previously communicated, this will have a positive impact on our reported earnings and will be netted out of adjusted earnings in the third quarter.
While we're making progress, particularly on adjusting our assortments to better reflect shifting styles and evolving fashion across our brands, we know we have more work ahead of us. We're also navigating a unique set of circumstances, a CEO transition, new leadership at our largest brand, Old Navy, and several actions currently in flight towards rightsizing our inventory and our cost structure. On top of that, the intensifying promotional background and signs of weak demand in the low-income consumer are making forecast precision increasingly difficult.
That being said, we are committed to providing transparency as it relates to our forward outlook. We will continue to provide you with color on the factors that are most in our control, and come back with further details once we have greater clarity on the consumer response to our product and inventory actions, and once we have more of the work pertaining to our cost-saving initiatives complete. Now let me turn to the balance sheet and cash flow. Ending inventory of $3.1 billion was up 37% year-over-year. This includes nearly 10 percentage points of pack and hold inventory and 7 percentage points related to in-transit.
More than half of the remaining increase is attributable to elevated levels of slow-turning basics and the remainder seasonal product. I'd like to provide a brief reminder on our pack and hold strategy and approach for managing basics. As you may recall, we have utilized pack and hold strategies as an inventory management tool in the past, which has proven to be successful. While the use of cash in the short term, we are able to optimize our margin in the near term and benefit working capital next year as we buy lower receipts and sell through the pack and hold inventory.
We're confident that we will be able to integrate our pack and hold inventory with future assortments as the majority of goods are carefully selected seasonal core items we routinely use to round out our assortments. Examples of these more timeless styles are basic shorts or short lead tees and takes. While we've had some supply chain impacts as well as product assortment missteps in the near term, we are focused on sequential inventory improvement and deeply committed to inventory productivity and getting back to our responsive levers.
As discussed earlier, we've taken action to write off unproductive inventory in the second quarter and cut receipts across the assortment beginning in late fall and into holiday, positioning our brands to be able to take advantage of our reinstated responsive capabilities and chase into demand as we enter fiscal 2023. These actions are part of our focused approach to inventory planning for the remainder of fiscal 2022 and beyond. As we look to the remainder of the year, we believe that third quarter ending inventory growth will moderate substantially and are targeting negative inventories versus last year by the end of the fiscal year.
Quarter-end cash and equivalents were $708 million. Year-to-date net cash from operating activities was an outflow of $207 million. Free cash flow was an outflow of $613 million, above our historical first half outflows, driven by our net loss and the timing of merchandise payments. As we look to the second half, we anticipate more normalized cash levels as we cycle the inventory timing effects of the supply chain challenges last year as well as benefit from the actions we've taken to reduce receipts as we move through the back half and into fiscal 2023.
We have taken action to fortify our balance sheet and cash positions. We have cut or deferred some capital spending and reduced the number of Old Navy new stores slated for the back half of the year, and now expect capex of approximately $650 million for the year compared to our prior expectations of $700 million. During the quarter, we completed an amendment and extension of our secured revolving credit facility, securing modestly improved pricing, while increasing flexibility and liquidity within our capital structure.
We remain committed to delivering an attractive quarterly dividend as a core component of total shareholder returns. During the quarter, we paid a dividend of $0.15 per share. And on August 15, 2022, our Board approved a $0.15 dividend for the third quarter of fiscal 2022. During the second quarter, we repurchased 5.7 million shares for approximately $57 million as part of our plan to offset dilution. We do not anticipate further share repurchases for the remainder of fiscal 2022 as we've completed our goal early of fully offsetting dilution for the year.
In closing, we've taken action in light of our executional challenges to rightsize inventory, reevaluate our investments, optimize cash management and taking a more conservative approach to our outlook. While we continue to navigate a difficult consumer environment and a promotionally competitive environment, we are confident in the actions we're taking and believe we are taking the right steps to position Gap Inc. back on its path towards growth margin expansion and delivering value for our shareholders over the long term.
With that, we'll open up the line for questions. Operator?
