Gap’s Underwhelming Profit Forecast Suggests Lingering Problems

February 26, 2016, 12:10 AM UTC
Photograph by Justin Sullivan — Getty Images

Gap Inc, (GPS) the largest U.S. specialty apparel retailer, gave a modest profit forecast for 2016 that suggested to investors it would continue to face challenges this year to improve its business this year.

The company, which operates Banana Republic and Old Navy in addition to its namesake brand, said on Thursday it expected a profit of $2.20 to $2.25 per share, including a hit from foreign exchange, well below analysts’ estimates for $2.44. The modest projection sent shares down 4% in afterhours training.

The forecast comes after a horrible year for Gap Inc. The Gap brand’s comparable sales in fiscal 2015 fell 6%, while those at Banana fell 10%. And Old Navy, long a high-flyer, was flat for the year, hurt by a sudden drop at the end of year, which started soon after the departure of star executive, Old Navy former President Stefan Larsson, to become CEO of Ralph Lauren. (RL).

Gap’s attempts to fix its business come at a time consumers are spending less on clothing and the strong U.S. dollar means overseas profits come out to less money. That’s on top of a mild winter that delayed spending on cold-weather items and more intense apparel competition (Gap Inc. CEO Art Peck acknowledged on a call with investors that the arrival of the ultra-cheap fast fashion chain Primark was on his radar.)

While Peck last year said he expected his moves to translate into improved numbers by the spring of 2016, Gap was more muted about the timing of any improvement in sales. In fact, CFO Sabrina Simmons told analysts that Gap Inc. did not necessarily have to have positive comparable sales to reach its profit forecast.

Still, Peck said the company has dug deep into what went wrong at the different brands and how to remedy things. For example, at Banana Republic, where star designer Marissa Webb left as creative director in the fall, things went too fashion forward. “We were trying to lead on fashion and trend, and she (the customer) does not want Banana to be that,” Peck told analysts on a conference call. There was also product that was literally ill suited to customers- Peck spoke of some blazers that women could get their arms through.

Peck told analysts that he nonetheless feels Gap Inc. is finding its footing again, and in a better position to jump quickly on trends and capitalize on them. 2016 is his chance to prove it.

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