After Positive Results In June, Gap Returns To A Sales Decline

Shares of Gap Inc (NYSE:GPS) fell 4.4% in post-market trading on Monday, once the company announced a slip in the revenue and same-stores sales for the month of July, as well as for the second quarter. This coming on the back of promising results in June, when the company posted 2% comparable sales growth, is definitely disappointing. Given the general weakness in the retail industry, and increasing competition from fast-fashion and internet retailers, we expect the company’s Old Navy brand to be the standout performer, with falling revenue per square foot in its namesake Gap brand, and its higher-priced Banana Republic brand.

The company has been struggling with falling sales as of late, and the stock has declined considerably in the face of a gloomy outlook. While the stock has declined substantially in the past five months, it is trading at a positive from its opening on January 4th.

See our complete analysis for Gap Inc.

While the second quarter comparable sales improved on a sequential basis, they remained in negative territory, and worsened in comparison to June results. This implies that a turnaround isn’t in the cards, as of now. For the quarter, the comps declined 2%, on a 3% decline at Gap, a 9% fall at Banana Republic, and flat performance at Old Navy. This performance was better than that for the first quarter, when the company reported a 5% comparable sales decline. After the positive performance in June, up 2%, driven by 5% growth at Old Navy, July sales plunged 4%, with a 4% fall at Gap, 14% decline at Banana Republic, and a flat performance at Old Navy. The July results were much worse that what was expected by analysts polled by Thomson Reuters, who had expected Gap’s overall comps to decrease by 0.3% last month, including a fall of 3.9% at Banana Republic, a drop of 1.4% at its namesake brand, and an increase of 1.6% at Old Navy. While June benefited from the Memorial Day holiday, back to school sales were expected to help in July.

In May, the company had warned of weak sales across its portfolio, and noted steps would be taken to streamline its business. This included evaluation of its Banana Republic and Old Navy operations outside North America. During the first quarter earnings call, the decision to shut the Old Navy stores in Japan, in order to concentrate on its operations in North America and China, was announced. Further, in Banana Republic and Old Navy, the company has made adjustments to the ticket prices, where it was felt that the initial prices weren’t competitive. CEO Art Peck is also following in the steps of his predecessor, Glenn Murphy, by focusing on speeding up the production time and improving the supply chain. The company has been looking to improve its production times and work on its processes in order to quickly react to the changing fashions. This would help them to better compete with fast fashion retailers, such as H&M and Zara. Another problem facing the company is its excessive promotional strategy. The company’s three main brands remain heavily discounted, and while this was recognized by the management, they failed to act on it in the first quarter. According to research by Wells Fargo, both the Gap and Banana Republic brands were more promotional than they were in the same period last year, while Old Navy was similarly promotional. In May, Peck announced that steps were being taken to “tighten up” their discounts.

The company is also not immune to the broader challenges facing the retail industry, including lower spending on clothing, as compared to a greater preference for dining out and travel. Moreover, brick and mortar stores must also compete against numerous design labels that can market themselves directly to consumers via the internet. By eliminating the middle men, these newcomers can provide high quality merchandise at lower prices. As noted by Peck, “Amazon’s presence in e-commerce is undeniable” in the US, and the online giant is well on its way to becoming the largest apparel retailer in the country by 2017.

Have more questions about Gap Inc? See the links below:

• Are There Signs Of A Turnaround At Gap, Or Is It Just A Blip On The Radar?
• Are Gap Inc’s Earnings Volatile?
• What’s Gap Inc’s Revenue & Net Income Breakdown In Terms Of Different Brands?
• By How Much Did Gap Inc’s Revenue & EBITDA Grow In The Last Five Years?
• What Is Gap Inc’s Fundamental Value Based On Expected 2016 Results?
• By What Percentage Can Gap Inc’s Revenues Grow Over The Next Three Years?
• How Are Gap Inc’s Old Navy Revenues & Earnings Expected To Grow Over The Next Five Years?
• How Are Gap Inc’s Banana Republic Revenues & Earnings Expected To Grow Over The Next Five Years?
• How Much Revenues Can Gap Inc’s Athleta Brand Add By 2020?

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