As I reflect on the last 18 months, I'm inspired by the incredible transformation our teams have made in such a short time despite an ongoing pandemic-related disruption to our business and the broader economy.
While we had planned into the known supply chain constraints as we entered the quarter, including COVID-related closures in Vietnam, the shock to our business persisted longer than anticipated as weeks turned into months.
Online sales grew 48% in the quarter compared to 2019, representing 38% of total sales, and our migration to the cloud has unlocked innovation in our tech portfolio.
We will strategically shed an estimated 1 billion in sales by year-end versus 2019 by closing unproductive stores, divesting smaller brands, and partnering our European business to drive focus and profitability.
Despite the supply chain disruption, comp sales were up 5% on a two-year basis, with three of our four brands delivering positive two-year comps.
Net sales were down 1% to 2019, which includes an estimated 8%-point impact due to supply chain headwinds.
Old Navy delivered 8% sales growth versus 2019, a deceleration from the first half as the brand was disproportionately affected by inventory lateness during the quarter.
1 rank in kids market share according to NPD and sustained its kids and baby growth trend from the first half with strong back-to-school performance.
The momentum continues at Gap brand, particularly North America, with comparable sales up 13% versus 2019, and net sales nearly flat despite the almost 18 percentage points of revenue we shed through strategic store closures.
With over 70% of the Yeezy Gap customers shopping with us for the first time, this partnership is unlocking the power of a new audience for Gap, Gen Z plus Gen X men from diverse background.
Banana Republic reported a net sales decline of 18% versus 2019, and a negative 10% two-year comp.
Like Gap, we walked away from about 10 percentage points of unprofitable revenue due to strategic store closures.
And finally, Athleta delivered an outstanding quarter with 48% net sales growth versus 2019, using its unique and ownable mission to empower women and girls through the power of she.
Athleta grew brand awareness of 33% versus 27% last year, according to YouGov, by embracing celebrity partnerships, Simone Biles and Allyson Felix, who took to the world stage in Tokyo.
And customers are quickly embracing Athleta well, their new immersive digital community rooted in well-being with the active user base growing 50% every month since launch.
Our online sales grew 48% in the quarter compared to 2019, and we maintained our rank as No.
Our sizable active customer file sits at 64 million, and those customers are spending more on average than they were two years ago.
Now, with more than 45 million members, our loyalists are two times more likely to shop across brands, and three times more likely to shop across channels.
Our strong active and fleece business and our Denim business are expected to generate revenue of 4 billion and 2 billion, respectively, this year; and our kids and baby business owns 9% market share across Old Navy, Gap, and Athleta.
Earlier this month, the USAID, Gap Inc., Women + Water Alliance announced that we have empowered 1 million people to improve their access to clean water and sanitation, already halfway to our goal of reaching 2 million by 2023.
Our operating margin remains on track to hit 10% by 2023, in line with our plan, even as we navigate these near-term disruptions.
We lost approximately $300 million of revenue or eight percentage points of sales growth on a two-year basis due to longer transit times and lost weeks of production, which led to on-hand inventory shortages in the quarter.
In addition, while our production capacity is largely globally diversified, approximately 30% of our product is produced in Vietnam, where factory closures extended to over two and half months, significantly longer than initially anticipated.
Our average on-hand inventory in Q3 was 11% below fiscal year 2019.
So despite strong sell-through trends, we lost volume as a result of limited supply.
In addition to an estimated $100 million of air costs incurred in Q3, we've also invested approximately $350 million in Q4 airfreight to further expedite holiday deliveries.
While we aspire to improve our on-time deliveries for holiday by adding air capacity and utilizing alternate ports, the supply chain situation continues to be volatile.
We remain cautious in our outlook for the balance of the year and are updating 2021 earnings per share guidance range to $0.45 to $0.60 per share on a reported basis, and $1.25 to $1.40 per share on an adjusted basis.
This range now reflects the estimated lost sales from supply disruptions in the second half of 2021 to be $550 million to $650 million.
In addition, our updated guidance range reflects approximately 450 million of transitory airfreight costs we have chosen to incur as we seek to meet as much customer demand as possible.
Net sales of 3.9 billion for the quarter were down 1% to 2019 with our Q3 sales deceleration from the first half of the year due to supply chain issues.
Comp sales improved 5% on a two-year basis.
We're particularly pleased that three of our four brands delivered strong two-year comp growth with Old Navy up 6%, Gap Global up 3%, and North America up 13%, and Athleta up 41%, all while navigating acute supply issues.
And while Banana Republic's two-year comp was down 10%, the brand made progress in the quarter through its product and customer experience relaunch.
Our strong e-commerce channel continues to be an advantage as online sales were up 48% compared to 2019, contributing 38% of sales in the quarter, up from 25% of total sales in Q3 2019.
Third-quarter reported gross margin was 42.1%, an increase of 310 basis points versus 2019.
Excluding impacts related to the transition of our European business to a partnership model, adjusted gross margin of 41.9% for the quarter represent the highest Q3 gross margin rate in over 10 years, expanding 290 basis points versus 2019 gross margin.
This is primarily driven by 300 basis points in ROD leverage from higher online sales and lower rent occupancy and depreciation as a result of strategic store closures and renegotiated rents.
Merchandise margins were down just 10 basis points, despite nearly 200 basis points of higher online shipping costs and about 250 basis points in short-term headwinds related to airfreight.
Reported SG&A, which includes 26 million in charges related to the transition of our European operating model was 38.3% of sales, deleveraging 470 basis points compared to Q3 2019.
On an adjusted basis, SG&A was 37.6% of sales, 610 basis points above 2019 adjusted SG&A.
Marketing, up 360 basis points versus 2019, supported the rollout of our new initiatives, particularly loyalty, inclusive sizing at Old Navy, and the brand relaunch at Banana Republic, and is a major contributor to our low discount rates.
Regarding operating margin, operating margin for the quarter was 3.9% on a reported basis.
Excluding $17 million in charges related to our European market transition, adjusted operating margin was 4.3%, which as I noted earlier, includes the impact of an estimated 300 million in lost sales due to constrained inventory in addition to approximately 100 million in nonstructural airfreight costs.
During the quarter, we restructured our long-term debt by retiring all of our 2.25 billion senior secured notes and issuing 1.5 billion of lower coupon unsecured senior notes.
Through this debt restructuring, we were able to reduce our overall debt balance, achieve material interest savings, approximately $140 million on an annual basis beginning in 2022, and unencumber our real estate assets previously pledged as collateral.
We incurred a 325 million nonrecurring charge related to debt extinguishment in the quarter.
Q3 net interest was $43 million.
Full-year net interest is now expected to be $163 million.
Looking beyond 2021, we expect annual net interest expense of around $70 million.
The effective tax rate was 29% for the third quarter.
Excluding the impact from fees related to debt extinguishment and the charge changes to our European operating model, the adjusted effective tax rate was 20%.
We expect the full-year effective tax rate to be about 23% on a reported basis and about 26% on an adjusted basis.
Regarding earnings on the quarter, Q3 reported earnings reflect a loss of $0.40 per share.
Excluding fees associated with our long-term debt restructuring and the transition of our European markets to a partnership model, adjusted earnings per share for the quarter were $0.27.
Inventory delays worsened throughout the quarter, and our Q3 sales down 1% versus 2019 outpaced average on-hand inventory of down 11% to 2019.
Third-quarter inventory ended flat to 2019 and down 1% versus 2020, with average on-hand inventory down 7% and in-transit up 16% versus last year.
Regarding the balance sheet and cash flow, we ended Q3 with $1.1 billion in cash, cash equivalents, and short-term investments.
During the quarter, we continue to earn -- to return cash to shareholders, paying a Q3 dividend of $0.12 per share and repurchasing $73 million in shares as part of our current plan to offset dilution.
And earlier this month, we announced a Q4 dividend of $0.12 per share.
Looking at our global store fleet, we are planning to close 350 Gap and Banana Republic.
North America stores is expected to be approximately 75% complete by the end of the year.
Full-year 2021 reported earnings per share are now expected to be in the range of $0.45 to $0.60, which includes net charges of 445 million, comprised of 325 million in fees related to the restructuring of our long-term debt, and approximately 120 million related to divestitures and the transition of our European business model to a part -- European business to a partnership model.
Excluding these charges and associated tax impacts, full-year 2021 adjusted earnings per share is expected to be in the range of $1.25 to $1.40.
First, we expect 2021 full-year revenue growth of about 20% versus 2020.
This range now reflects the expected lost sales from supply disruptions in the second half of 2021 of approximately 550 million to 650 million, including an estimated 300 million from Q3 and an estimated 250 million to 350 million in Q4.
Second, we expect full-year nonstructural airfreight to be approximately $450 million.
We consciously chose to air approximately 35% of our holiday product given the two-and-a-half-month delays from Vietnam closures in Q3 and the over three-week West Coast port delays so that we can give our customers as much holiday product as we can to deliver on their expectations.
With the added air cost and the meaningful sales impact from supply constraints, we now expect full-year 2021 reported operating margin to be about 4.5%, with adjusted operating margin at about 5% for fiscal 2021.
This is inclusive of short-term air costs in the back half, impacting operating margin by about 270 basis points.
Full-year capital spend is still expected to be approximately $800 million.
The progress we've made on our Power Plan 2023 strategy in the face of these challenges highlights the strength of our core business and the health of our brands, and we remain confident in our path as we move toward a 10% operating margin in 2023.

Summary:
While we had planned into the known supply chain constraints as we entered the quarter, including COVID-related closures in Vietnam, the shock to our business persisted longer than anticipated as weeks turned into months.
Online sales grew 48% in the quarter compared to 2019, representing 38% of total sales, and our migration to the cloud has unlocked innovation in our tech portfolio.
Despite the supply chain disruption, comp sales were up 5% on a two-year basis, with three of our four brands delivering positive two-year comps.
Old Navy delivered 8% sales growth versus 2019, a deceleration from the first half as the brand was disproportionately affected by inventory lateness during the quarter.
Banana Republic reported a net sales decline of 18% versus 2019, and a negative 10% two-year comp.
So despite strong sell-through trends, we lost volume as a result of limited supply.
While we aspire to improve our on-time deliveries for holiday by adding air capacity and utilizing alternate ports, the supply chain situation continues to be volatile.
We remain cautious in our outlook for the balance of the year and are updating 2021 earnings per share guidance range to $0.45 to $0.60 per share on a reported basis, and $1.25 to $1.40 per share on an adjusted basis.
Comp sales improved 5% on a two-year basis.
Our strong e-commerce channel continues to be an advantage as online sales were up 48% compared to 2019, contributing 38% of sales in the quarter, up from 25% of total sales in Q3 2019.
Excluding the impact from fees related to debt extinguishment and the charge changes to our European operating model, the adjusted effective tax rate was 20%.
Regarding earnings on the quarter, Q3 reported earnings reflect a loss of $0.40 per share.
Full-year 2021 reported earnings per share are now expected to be in the range of $0.45 to $0.60, which includes net charges of 445 million, comprised of 325 million in fees related to the restructuring of our long-term debt, and approximately 120 million related to divestitures and the transition of our European business model to a part -- European business to a partnership model.
Excluding these charges and associated tax impacts, full-year 2021 adjusted earnings per share is expected to be in the range of $1.25 to $1.40.
First, we expect 2021 full-year revenue growth of about 20% versus 2020.
With the added air cost and the meaningful sales impact from supply constraints, we now expect full-year 2021 reported operating margin to be about 4.5%, with adjusted operating margin at about 5% for fiscal 2021.