Are There Signs Of A Turnaround At Gap, Or Is It Just A Blip On The Radar?

Gap Inc (NYSE:GPS) recently posted a 2% increase in comparable sales for June, against analysts’ expectations of a 3.6% decline. The company has been struggling with falling sales as of late, and the stock has declined considerably in the face of a gloomy outlook. June’s results represent the first positive comps reported in 15 months, with the stock soaring on the results announcement.

The comparable sales growth is a key indicator of a retailer’s health, as it excludes potentially distorting results from stores that were recently either opened or closed. The positive results were driven by the company’s Old Navy brand, which is a low price brand that generates 40% of the company’s total sales. An improvement was also noticed in the June traffic trends. Furthermore, the Sunday and Monday of this year’s Memorial Day holiday also fell in the fiscal month of June, as opposed to during May of last year.

Trends at the Gap brand have improved year-on-year since the beginning of this financial year. However, they still remain negative. Meanwhile, sales at Banana Republic, the company’s higher priced brand, continue to be poor. While the 4% decline in comps is better than the 11% seen in May, the brand hasn’t reported positive same-store sales for over a year. Old Navy seems to be the brand to be most optimistic about, as it targets the booming value-shopping space. Positive comps in June are after seven months of decline; which is minuscule when compared to roughly 18 to 24 months of woes at Gap and Banana Republic.

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 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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