Gap Inc. Shares Soar Despite A Fall In Sales

October 12th, 2016 by Trefis Team
+4.75%
Upside
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Gap

Gap Inc‘s (NYSE:GPS) share rose 15% on Friday, after the company reported a 3% fall in comparable sales in September, on October 6, 2016. Total sales declined 2% to $1.43 billion. However, a fire at one of Gap’s distribution centers in late August disrupted operations. The company claims the fire destroyed 12 million units of mostly Gap-branded merchandise, which negatively affected comps for the company by 3%. While the figure seems quite large, if accepted at face value, it would have transformed the negative comparable sales into a flat performance.

Gap Stock Price

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The metric across brands was quite varied; the namesake Gap brand witnessed a 10% fall in comps, or a 5% decline, if the impact of the fire is excluded. Banana Republic, the company’s weak link, suffered from a 9% decline, or a 6% fall after adjusting for the fire’s impact. The only positive was Old Navy, which reported a 4% rise, or 6% growth without including the negative effect of the fire. This indicates the Old Navy brand may be gaining traction, amid a bleak outlook for the overall retail industry, including Gap’s other brands.

Gap September Sales

The company also disclosed a rise in merchandise margins in September, which came in higher than expected, more than offsetting the negative impact from the fire. This implies the company was less promotional during the month. However, the negative impact of the fire will be carried on to October, and could result in another three percentage point decline in comps. This would also have a negative impact on the comparable sales results in the fourth quarter as well.

Banana Republic can be identified as the weak link for the company, as it has not reported positive monthly comparable sales for over a year. Lackluster product assortment is pushing customers away from the brand, and the consumers are unwilling to pay the premium prices it once commanded. Consequently, it is falling into the same trap as Gap, by resorting to discounting and deals to get rid of the built up inventory. 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, 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. While its recent offerings have been panned by the consumers, the success of this collection remains to be seen.

On the other hand, Old Navy can be considered the only bright spot among Gap’s major brands. However, while this brand has also been sliding recently, a 4% growth could indicate the possibility of a turnaround. The metric even came in above consensus estimates of just 1% growth. While the improvement in merchandise margins at Old Navy are good signs, the company still has a long way to go.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Gap Inc.
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