“Fall into the Gap” was once a popular marketing tagline for Gap Inc. Now it’s a grim description of the way the company’s numbers are going, except maybe replace the word “Gap” with “chasm.”
Gap will end another week with a lower share price, as once again the retailer has lowered the bar for full year guidance, noting that it expects adjusted earnings of between $1.87 and $1.92 per share for fiscal 2016, missing FactSet analysts’ expectations of $1.95 per share.
Second quarter earnings clocked in at 60 cents a share – a dropoff from the 64 cents per share the firm was putting up a year ago. Sales were down to $3.85 billion from $3.9 year-to-year. Analysts surveyed by FactSet had expected adjusted earnings of 59 cents a share on sales of $3.85 billion. Gap also confirmed that closing three stores remains on the menu.
Among other red ink on display, comparable sales were down 2 percent- which was a little bit better than the 2.2 percent being predicted. The flagship brand – The Gap – saw a 3 percent drop, which is not great news but halves the 6 percent drop from this time last year. Banana Republic, on the other hand, saw a bigger drop – sales are down 9 percent this quarter versus down 4 percent at this time last year. Old Navy sales were flat – which improves the losses Gap saw this year – but underperforms the 3 percent growth the discount chain logged last year.
Gap has been in a turnaround effort for some time, but so far actual turns are not in evidence. But the company’s ever-optimistic CEO, Arthur Peck, believes that better news is forthcoming. Peck told investors that Gap’s issues come from fit, customer dissatisfaction and “havoc” in the supply chain.
“When you’re inconsistent on fit, [the customer] quickly learns that she’s going to order a two, a four and a six, knowing that four is her size, and obviously figuring out which one fits, and then sending the other two back or returning them to a store,” Peck said on the call. “And that has a drag of cost and devalued merchandise associated with it as well… [That’s] a big deal for us and when we’re at our best, we really kill it on fit. And she really appreciates that. But we’ve done too much wandering around the landscape over the last couple of years, as we’ve tuned and tweaked fit and not had a consistent fit.”
Peck further noted that marketing investments are in the future – after two quarters of flat funding for ad – since additional advertising pressure had been a great help to Old Navy.
“Next really is to bring the voice of the brand back, and start telling the story,” Peck said. “We really pivoted it towards traffic and digital, but we’ve not been telling the story about the product and about the quality of the fit, etc. – all the elements of the story to the extent that we need to. And so, as we look at the back half, that’s something that’s very much on my mind, as you can imagine.”