Distribution Center Fire To Play A Dampener On Gap Inc.’s Earnings

Gap Inc (NYSE:GPS) recently reported its October sales, which impressed investors and resulted in the stock price rising 5% on that day and almost 13% in total. The company reported a 1% drop in same-store sales for October, citing a negative impact of three percentage points from the August fire in one of its distribution centers. What is encouraging for the investors is that the fall in comps was primarily caused by the fire, and if that event had not occurred, the company would have reported a positive 2% growth in same-store sales. The third quarter sales fell slightly to $3.8 billion from $3.86 billion in the third quarter of the previous year. The company also issued an EPS guidance of $0.59-$0.60, compared with analyst estimates of $0.53. This also prompted analysts to raise their earnings expectations to $0.60 per share.

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There are signs the company may finally be on the road to recovery, with promising results posted in the month. It is also a second month in a row when the company has posted encouraging results. In September, Gap had stated its comparable sales fell 3%; however, if the negative impact of the fire, which occurred in a building on its Fishkill, New York distribution center campus, are excluded, it would have resulted in a flat performance. Old Navy has continued with its streak of positive comps, with 3% reported in October. Once this figure is adjusted for the fire impact, it would translate to a 4% growth in same-store sales.

Even Banana Republic improved on its previous performance, with -4% comps reported, a flat performance if the fire impact is excluded. The brand is banking on its collection co-signed by fashion personality Olivia Palermo, their newly hired global style ambassador, to help pull itself out of the rut. The collection, which debuted at the New York Fashion Week, went on sale online alongside the presentation, in continuation of their see-now-buy-now strategy. Like other mall-based retailers, the company is being hurt by the declining foot traffic, and a shift in consumer spending towards travel and experiences, rather than on clothing. The retailer’s strategy of never-ending discounts has also trained customers to avoid buying at full price. In its earnings call in May, CEO Peck acknowledged the damage done to the Banana Republic brand by its excess promotions. The company has now tightened its promotions, and instead of discounts, the brand is offering its limited-edition collection with Palermo in order to attract more customers.

During the quarter, Gap also announced its intentions to close all eight of its Banana Republic stores in the UK, as a part of its review of its overseas presence. The company intends to focus on North America to revive its sales, after announcing in May that the company will be reassessing its international operations of Banana Republic, which can be identified as a weak link for the Gap. The majority of the stores will be closed by the end of its 2016 fiscal year, a company spokesperson stated, a measure which was part of a broader strategy to improve the company’s overall performance. Shoppers will still be able to order items from the retailer’s regional website.

Banana Republic is also converting some of its full-price stores into outlets, located in urban shopping areas in the US. According to reports, at least three will be converted this year, including one in Queens, expected to open as a factory store. As per a statement regarding the conversions, Banana Republic said “We always evaluate our store fleet to ensure we have the right stores in the right locations to best serve our customers’ needs.” However, this may undermine its recent efforts to turn around the brand, since these factory stores tend to offer merchandise at lower prices, which would, in turn, negatively impact the company’s strained margins.

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

• Gap Inc.’s Stock Rises Despite A Fall In October Sales
• How Gap Inc. Is Cashing In On The Athleisure Trend
• Banana Republic To Shutter Its UK Stores Amid A Sales Slump
• Gap Inc. Shares Soar Despite A Fall In Sales
• How Is Gap Expected To Perform In 2016?
• Gap Reports Yet Another Month Of Declining Comparable Sales
• Can Old Navy Win The Back-To-School Market?
• What Are The Problems Plaguing Gap Inc.?
• Gap Reports A Weak Outlook For FY 2016
• Fall In Sales To Weigh On Gap In The Second Quarter
• After Positive Results In June, Gap Returns To A Sales Decline
• 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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