Gap’s Sales Decline Continues: Has The Company Lost Its Battle With Fast Fashion Retailers?

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GAP
GREAT ATLANTIC & PAC TEA

Gap Inc‘s (NYSE:GPS)  reported its first quarter sales of $3.44 billion, a 6% decline compared to the first quarter sales last year. (Fiscal years end with January and the company will report full first quarter results on a yet-to-be scheduled date soon.)  Sales for the month of April 2016, in turn, stood at $1.12 billion, nearly 7.5% lower compared to the same month last year. Comparable sales for April 2016 were down 7%, compared to a 12% decrease in the prior year. In addition to reporting these numbers, the company gave a lower-than-expected guidance on EPS for Q1 2016 and its stock price fell by nearly 15%, reaching its lowest point since 2012. Gap has been struggling to increase revenues as it faces intense competition from fast fashion retailers such as Zara, H&M and Forever 21.  These players who have been consistently driving store traffic with their affordable merchandise and quick inventory turnover. While Gap is working on revival strategies, their impact is not yet visible and the company continues to lose customers. The company has launched a transformation program that is aimed at achieving a more efficient and flexible business model.  Until it shows results, the short term prospects of the company look bleak.

We will be revising our price estimate for Gap after the company announces its Q1 2016 results shortly.

See our complete analysis for Gap Inc.

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Faster Pace of Transformation Essential For Survival

While Gap has been working on initiatives to make its operating model more efficient and flexible, the pace of transformation appears to be slow and results are not yet visible. The company continues to lose customers, leading to a decline in comparable sales and falling revenues. Gap stated that it entered April with more inventory than planned as a result of weaker than expected traffic, putting pressure on its gross margins. With slow moving inventory, Gap is getting trapped into a vicious cycle where outdated designs lead to inventory accretion and subsequent write downs to clear unsold merchandise.   Leading the cycle is the inability to bring fresh designs to its shelves, which (in our view) is due tothe lack of an efficient operating model. With e-commerce retail picking up, Gap’s physical stores are proving to be a liability for the company as sales decline, impacting operating leverage and consequently margins. The company’s woes don’t end here. Recently Fitch ratings downgraded Gap’s credit rating to junk status (one notch from BB+ to BBB-) on concerns about declines in comparable store sales and gross margins. Fitch said that it was also worried about Gap’s “continued reliance” on large scale cost reduction programs to protect profitability in the face of sales decline. This downgrade implies that it will be increasingly difficult for the company to raise new debt for any of its transformation initiatives.

Gap is facing a challenging situation and needs to re-establish its brand identity between low end fast fashion retailers and higher end fine apparel brands. The company management stated that it is committed to positioning  Gap better to recapture market share in North America. Yet its current initiatives are falling short of this goal. A more focused strategy and faster pace of transformation is essential for its revival.  Gap is also looking to capitalize on strategic international regions where there is a strong runway for growth and this could provide the much needed boost to the company’s revenues. In the short term however, growth prospects look very bleak.

 

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