Gap’s Sales Slump Continues In The Third Quarter

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Gap Inc. (NYSE:GPS) recently reported its October sales, wherein it reported a 1% drop in same-store sales for the month, citing a negative impact of three percentage points from the August fire in one of its distribution centers. What is encouraging for 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.

Gap Q3 2016 Earnings - 2

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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 the month. Once this figure is adjusted for the fire’s 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 one positive to come out of the distribution center fire was the gross margin and merchandise margin improvement, with more full-price selling and less inventory as a result of the Fishkill losses.

Gap Q3 2016 Earnings - 3

The Banana Republic 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 a 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.

Gap is also bullish on the long term opportunity in China, despite the slowdown in the economy. The Gap specialty and factory stores continue to resonate well with the consumers, and the online business has very attractive economies. However, in general, and particularly in the US, the retail environment continues to be challenging, with slowing traffic. The company is undertaking a number of steps, including holiday campaigns, to continue the improvement of the business. Earlier in the year, the company had announced the closing down of 140 of its 675 North American stores, and the shedding of 250 corporate jobs by the end of the fiscal year (ended January).

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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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