Three and a half years after Gap CEO Art Peck first started to lay out his plan to fix the company’s once iconic namesake brand, investors seem fed up with his failure to do so.
Shares of Gap Inc. fell 11% on Friday, the morning after the company reported that comparable sales at The Gap brand fell 5% in the second quarter. The dismal performance raises the question of whether the company can ever turn the flagship brand around if it can’t do so in the strongest retail environment in years. The results seemed all more paltry compared to the 2% and 5% comparable sales increases at its sister chains Old Navy and Banana Republic, respectively.
In 2015, Peck detailed a plan to get The Gap, which generates roughly a third of its parent company’s sales, back on track, including the closing of stores, faster production, a digital push, and, as he conceded at the time, better product. Peck said things would turn around by spring 2016.
They didn’t. Comparable sales at The Gap have fallen for 16 of the last 18 quarters. Its stated reasons for decline keep changing; most recently, the company blames late deliveries that led to bloated inventory early in the year that later had to be sold at big discounts, a margin- and brand-destroying move.
In June, Gap Inc hired Neil Fiske as CEO of the brand, in another move to rehabilitate it. The much stronger performance of Old Navy, which generates nearly half of the company’s revenues, prompted one analyst, Jefferies analyst Randal Konik, to title a research note on Friday “Dear B.O.D. (board of directors)… Please Change Name of Company to Old Navy.” (In a bright spot, Banana Republic seems to be slowly getting back on track, while the much smaller Athleta chain continues to thrive.)
The Gap is not the only mall-based retailer struggling to find its way. Results at J.Crew, once a retail darling, have been even worse. But at a time of better sales performances at rivals like Abercrombie & Fitch and American Eagle Outfitters, not to mention various discount chains, it’s not surprising some on Wall Street don’t see a path back for The Gap right now. What’s more, The Gap’s inventory problems threaten the company’s profit margins for the second half of the year.
Peck told Wall Street analysts The Gap’s performance was “unacceptable.” But, he added: “We believe the worst is behind us.” Investors can be forgiven for being skeptical of something they’ve been told a few times before.
As Neil Saunders, managing director of GlobalData Retail, put it in a research note: “That the brand cannot deliver, even over a period of very robust consumer spending, is evidence that it is still broken.” And customers don’t appear to be waiting around for it to be fixed.
