Katrina O'Connell
Chief Financial Officer at GAP
Thank you, Bobby, and thanks, everyone, for joining us this afternoon. We moved swiftly in fiscal 2022 to manage the levers in our control and took action to drive immediate and long-term improvements across our business during what proved to be a challenging year. Most notably, we significantly reduced excess inventory, exceeding our year-end goal and driving merchandise inventories down 21% versus the prior year. We improved category, size and assortment balance at Old Navy, which helped drive an improvement in total company trends in the second half of the year, resulting in second-half sales down 2% year-over-year, compared to down 11% in the first half.
We aggressively managed costs, identifying $550 million in annualized savings with a significant majority expected to impact fiscal 2023 earnings and we further fortified our balance sheet, ending with $1.2 billion of cash, an increase of almost 40% from last year. While we are better positioned as we enter fiscal 2023, we continue to take a prudent approach to planning and managing our business in light of the continued uncertain consumer and macro environment.
Let me turn to our fourth quarter results. Net sales decreased 6% to $4.24 billion or 5% on a constant currency basis and in line with our expectations of mid-single-digit declines for the quarter. Compared to pre-pandemic levels in 2019, sales in the fourth quarter were down 9%, driven by the closure of more than 300 nonproductive Gap and Banana Republic stores, the transition to international partnerships and the divestitures of Janie and Jack and Intermix since 2019.
Absent closures and divestitures, fourth quarter net sales would be flat compared to 2019. Comparable sales in the fourth quarter were down 5% on top of a positive 3% comp last year. Comp trend in the second half of fiscal 2022 has improved meaningfully as compared to the first half of the year, primarily as a result of our assortment rebalancing efforts at Old Navy and Gap.
Store sales decreased 3% from the prior year, a trend improvement as consumers appeared to be shifting back to in-store shopping. Online sales were down 10% from last year and represented 41% of total sales in the quarter. Compared to 2019, online sales are up 29%.
Turning to sales by brand. Starting with Old Navy, sales in the fourth quarter of $2.2 billion were down 6% versus last year and down 4% relative to 2019. Old Navy comparable sales were down 7%, driven by weakness in kids and baby, offset by strength in women's. As discussed last quarter, we believe that Old Navy pulled forward some sales from the fourth quarter to October as a result of its efforts to get out earlier than typical with its first-holiday promotional event, which impacted growth in the fourth quarter.
In addition, we believe that Old Navy continues to experience demand softness from its lower-income consumers. After losing share in the first half of the year, Old Navy maintained share in the second half of the year, driven by market share gains in women's. As we look to fiscal 2023, we believe that Old Navy remains well-positioned given its value positioning in the marketplace.
Gap brand total sales of $1.1 billion were down 9% versus last year. Gap global comparable sales were down 4% and outpaced North America comparable sales as a result of lapping the outsized negative impact of COVID-related restrictions last year in Asia. Gap North America comparable sales were down 5%. The shutdown of Yeezy Gap negatively impacted growth in North America by approximately 2 points. Gap brand experienced continued weakness in the kids and baby and active categories during the quarter, which was offset by strength in women's. Gap brand maintained share in the second half of the year after losing share in the first half, driven by share gains in women's.
While Banana Republic delivered comparable sales growth of 9% and gained market share in fiscal 2022 as the brand continued to capitalize on the shift in consumer preference and its relaunch and elevated positioning of the brand last year, fourth quarter results were below our expectations. In the fourth quarter, Banana Republic sales were down 6% to $578 million, with comparable sales down 3%. We believe Banana Republic had some holiday product misses, including over-assorted sweaters and outerwear and a gifting assortment that didn't resonate with the consumer.
While dresses and suiting drove comp growth in the quarter, we do remain mindful of the fact that BR has been a beneficiary of the shift in consumer preferences to occasion and work-based categories, as people go back to work and events post-COVID.
Athleta sales of $436 million were down 1%, however, up 51% compared to 2019 pre-pandemic levels. Comparable sales were down 5%. We expect the brand to be delivering market share gains. We acknowledge that there have been broader product misses at Athleta. While the team is focused on course correcting, this could continue to impact growth in the near term. That being said, we're confident that the brand will get back to driving growth and profitability over the long term.
Now, to gross margin in fourth quarter. Gross margin in fourth quarter decreased 10 basis points to 33.6%. Merchandise margin increased 20 basis points, driven by 540 basis points of leverage, as we lapped last year's elevated air freight expense, offset by approximately 200 basis points of deleverage due to continued inflationary cost headwinds. The remaining 320 basis points of deleverage was primarily driven by discounting, resulting from our efforts to better position and clear excess inventory. ROD as a percentage of net sales deleveraged 30 basis points versus last year.
Now let me turn to SG&A. As you know, during the third quarter of fiscal 2022, we acted on approximately $250 million in annualized savings, stemming from the reduction of corporate roles, the renegotiation of advertising agency contracts and the reduction of technology operating costs and rationalization of digital investments.
SG&A in the fourth quarter was $1.45 billion, a decrease of 4% relative to last year. This decrease was driven by savings related to these cost actions, offset by higher seasonal labor costs. As a percentage of total sales, SG&A deleveraged 80 basis points from the prior year, as a result of the lower sales volume in the quarter. Fourth quarter net income was a loss of $273 million, primarily as a result of $230 million of tax expense related to quarterly earnings variability. EPS was a loss of $0.75. Share count ended at 366 million.
Turning to fiscal 2022 results. Fiscal 2022 net sales of $15.6 billion are down 6% compared to last year, including a 1 point foreign exchange headwind. Compared to 2019, net sales in fiscal 2022 were down 5%. As a reminder, we have removed close to $1.5 billion of unproductive sales since 2019 as a result of our North America fleet rationalization, divestitures and transition to international partnerships, which represents nearly 10 points of growth versus 2019.
Adjusted operating margin was 0% in fiscal 2022, down 550 basis points from last year, driven by 480 basis points of gross margin deleverage and 80 basis points of SG&A deleverage. Fiscal 2022 adjusted gross margin was 35% versus 39.8% in fiscal 2021. Merchandise margin was down 430 basis points driven by 50 basis points of air freight leverage, approximately 200 basis points of deleverage due to inflationary headwinds, and the remaining 280 basis points of deleverage, primarily from higher discounting versus last year. ROD as a percentage of net sales deleveraged 50 basis points versus last year. Adjusted SG&A of $5.48 billion in fiscal 2022 is down 4% from last year, driven by lower incentive compensation and lower marketing spend.
Now turning to balance sheet and cash flow, starting with inventory. As discussed, we made progress rightsizing inventory and exceeded our goal of inventory levels below last year by the end of fiscal 2022, and primarily driven by significant improvements at Old Navy. The 21% decline in ending inventories includes a 17 percentage point benefit related to in-transit as we lapped last year's supply chain challenges and two percentage points of growth related to pack and hold. The remaining decline is primarily driven by a decrease in fashion inventory.
As we look to fiscal 2023, we continue to moderate buys and will further lean into our responsive levers throughout the year, which will provide flexibility to better align inventory levels with demand trends. We are planning for inventory to be down more than sales in fiscal 2023 as compared to the prior. In addition, we will continue to integrate the inventory that was placed in pack and hold in fiscal 2022 into future assortments. This will benefit working capital as we buy lower receipts and sell through the pack and hold inventory.
We ended fiscal 2022 with cash and cash equivalents of $1.2 billion, an increase of 39% from last year. Net cash from operating activities in fiscal 2022 was $607 million as a result of our progress on improving inventory levels and composition coupled with our receipt cuts and leaner buys.
Capital expenditures were $685 million, slightly above our expectations, largely as a result of timing. Free cash flow was an outflow of $78 million and should begin to normalize throughout fiscal 2023. As we look to fiscal 2023, we expect to be positioned to pay down the $350 million draw on our asset-backed line of credit later this year.
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 March 2nd, our Board approved maintaining that $0.15 dividend for the first quarter of fiscal 2023. We completed our goal of offsetting dilution in fiscal 2022, repurchasing 10.6 million shares at an average price of about $12 per share. We anticipate very modest dilution in fiscal 2023 and therefore, do not anticipate meaningful share repurchase activity. We continue to have $476 million available under our current share repurchase program authorization.
Now, turning to our outlook. We continue to take a prudent approach to planning in light of the continued uncertain consumer and macro environment. Starting with Q1, let me first provide an overview of factors impacting year-over-year sales comparisons in the first quarter. The sale of Gap China to Baozun was completed in the beginning of the quarter. Gap China represented approximately $60 million of sales last year in Q1, representing a 2-point headwind to Gap, Inc. for the quarter. These sales need to be adjusted out of current Gap brand and Gap, Inc. sales assumptions. We are assuming a continued 1-point foreign exchange headwind in the first quarter.
While quarter-to-date, first quarter net sales are trending better than the fourth quarter. It's important to note that we have yet to reach the important March, April shopping period, which will be a significant volume period in the quarter. As I stated earlier, we also remain mindful of the uncertain consumer environment and are planning for sales to be down in the mid-single-digit range year-over-year for the quarter.
As it relates to first quarter gross margin, we expect significant year-over-year improvement compared to the 31.5% gross margin in the first quarter last year. This will be driven by approximately 550 basis points of leverage as we lap last year's elevated air freight. Approximately 360 basis points of deleverage due to inflationary cost headwinds as we are now selling product locked in at last year's peak cotton prices.
These inflationary headwinds are expected to moderate and become a tailwind in the back half of the year. At least half of this 360 basis point inflationary headwind is expected to be offset by less discounting and promotional activity, particularly at Old Navy. And ROD is expected to be roughly flat as a percentage of sales. We are planning to manage SG&A of approximately $1.2 billion in the first quarter largely reflecting the continued benefit of last year's savings actions, offset by higher incentive compensation.
Now turning to full year 2023. Starting with factors impacting year-over-year comparisons, Gap China represented approximately $300 million in net sales last year, representing a 2-point headwind to Gap Inc. in fiscal 2023. These sales need to be adjusted out of current Gap brand and Gap Inc. sales assumptions.
Fiscal 2023 will have a 53rd week, estimated to add approximately $150 million to net sales or 1-point of growth. Assuming a continuation of current trends, and taking a prudent approach in light of the continued uncertain environment, we believe fiscal 2023 net sales could be down in the low to mid-single-digit range. And as stated earlier, we are planning for inventory to be down more than sales in fiscal 2023.
Turning to gross margin. We expect to make progress towards getting back to pre-pandemic gross margins compared to the 35% adjusted gross margin in fiscal 2022, gross margin in fiscal 2023 is expected to be driven by approximately 200 basis points of leverage as we lap last year's elevated air freight. This will only be a tailwind in the first half of the year as air freight expense normalized in the back half of fiscal 2022. Approximately 100 basis points of deleverage versus last year due to inflationary cost headwinds. This is driven by approximately 300 basis points of deleverage in the first half of the year, shifting to a tailwind of approximately 100 basis points of leverage in the back half as we benefit from improved product costs and freight rates.
We believe the 100 basis points of inflationary headwind for the year could be more than fully offset as a result of our better inventory position and more normalized promotional activity relative to last year. And ROD is planned to be roughly flat as a percentage of sales compared to last year. We are targeting fiscal 2023 SG&A to be down low to mid-single digits from the prior year or approximately $5.2 billion. We are planning for higher incentive compensation and wage inflation in fiscal 2023, which we expect will be fully offset by the cost savings initiatives implemented in fiscal 2022.
In addition, we expect to realize roughly half of the $300 million in annualized savings that Bobby spoke to earlier in the back half of fiscal 2023. These savings will incur severance and other related costs, which will be adjusted out of fiscal 2023 reported operating and net income.
We are planning capital expenditures in the range of $500 million to $550 million, largely reflecting lower technology, project investments as well as fewer store openings. This year, we're planning to open 30 to 35 Old Navy and Athleta stores in total and plan to close 50 to 55 Gap and Banana Republic stores. We remain on track to achieve our goal of closing 350 non-strategic Gap and Banana Republic stores in North America by the end of 2023 and ended fiscal 2022 having achieved close to 90% of that goal.
So in closing, during what proved to be a challenging year, we moved swiftly to manage the levers in our control. We significantly reduced inventory, improved category size and assortment balance at Old Navy, aggressively managed costs, including identifying $550 million in annualized savings to-date and fortified our balance sheet. While we remain mindful of the continued uncertain consumer and macro environment, we are confident in the actions we're taking and believe we're taking the right steps to position Gap, Inc. back on its path towards sustainable, profitable growth and delivering value for our shareholders over the long term.
With that, we'll open the line for questions. Operator?
