Gap Inc. took a barrage of hits on Wall Street after the company reported disappointing results across its portfolio, though the picture isn’t entirely bleak.
Inventory is clean after months of clearing out excesses and is currently planned to be down more than projected sales. The company is tapping into its “pack and hold” inventory, which is merchandise warehoused for future seasons because demand fell short on the season originally intended for selling.
As Gap Inc.’s chief financial officer Katrina O’Connell said during Thursday’s conference call, the strategy going forward calls for “lower initial buys and chasing into trends.…We’re mindful of the uncertain environment.”
But O’Connell also said, “The first quarter is trending better than the fourth quarter,” and “inflation is expected to moderate and become a tailwind in the back half of this year.”
Across the Gap Inc. divisions, “There will be less promotional activity, particularly at Old Navy,” O’Connell said, which should translate into improved margins this year.
Gap Inc. executive chairman and interim chief executive officer Bob Smith said the board is close to naming a new CEO, to succeed Sonia Syngal who left in July. Smith also said three senior level executives — chief growth officer Asheesh Saksena; Mary Beth Laughton, president and CEO of Athleta, and Sheila Peters, chief people officer, have left or will leave the company.
In addition, executives said they continue to see areas where costs can be reduced. Over the last six months, the company has identified $550 million in annualized savings in total.
At Old Navy, according to the brand’s CEO Horacio Barbeito, “The women’s business showed positive momentum in the fourth quarter, which is a significant improvement and very important for the health of our brand. This was offset by weakness in kids and baby as noted by many others in the industry. But the good news is that we renewed the assortment in the new kids and baby flow. We’re seeing early improvement in sales trends.”
A total of 30 to 35 Old Navy and Athleta stores will open in 2023, while 50 to 55 Gap and Banana Republic stores will close, as the company continues to downsize its fleet of stores.
Old Navy, launched by then-Gap CEO Mickey Drexler in 1994, has historically been the corporation’s cash cow and key to profitability and shareholder value. However in January 2020, plans to split Old Navy into a separate public company were called off due to the business softening and the costs and complexities of splitting Gap into two companies.
After the San Francisco-based company reported a $273 million loss and 6 percent sales decline for the fourth quarter, Gap’s share price dropped around 5 percent Thursday, and continue to decline Friday, losing more than 6 percent through midday trading.
“Gap Inc. has ended its fiscal [year] on an extremely disappointing note,” wrote Neil Saunders, managing director of GlobalData. “Worryingly, the engines of growth have not only stopped spinning, but they have also gone into reverse across every single one of the company’s main divisions,” which are Gap, Old Navy, Banana Republic and Athleta. “This is a significant deterioration over other quarters when Gap was at least able to generate some growth from some of its more robust brands like Banana Republic or Athleta.
“Unfortunately, Gap is unable to use the excuse that it was up against tough prior-year numbers. For while the final period of 2021 was a boon for many retailers, Gap’s performance was anemic. This leaves the company in the unenviable position of seeing a continual decline in market share over a long period of time. Indeed, compared to the same period in 2019, Gap’s overall sales have shrunk by 9.2 percent and sales in its U.S. operation are down by 5 percent. This is a very unsatisfactory underperformance.”
Old Navy’s 3.6 percent in the fourth from the same period in 2019 “represents a significant fall from grace for a brand that was once a mainstay of the apparel market. To be fair, Old Navy remains a significant player, but it continues to lose customers at a rapid pace. Some of this is down to a more constrained family shopper who is pulling back on purchases to save money, especially at the lower end of the income spectrum. However, some is also because range development remains extremely poor. In our view, there is too much blandness and mundanity in the assortment.”
On the Gap brand, Saunders indicated the loss of Yeezy Gap last year left Gap lacking “any big hitter to pull people in and drive trade over the holiday season. As such, it was extremely reliant on its core ranges which, for the most part, consisted of the usual fare that it churns out every year. We continued to be shocked by Gap’s complete inability to experiment and try new things, even if they are at the margins.”
He said Banana Republic did have “a nice run of growth” but stumbled due to store closures, a shift away from work-casual styles, and a lack of newness over the holiday.
“We remain sidelined as we await visibility on material improvement,” Simeon Siegel of BMO Capital Markets, wrote in a note Thursday. “As Gap revenues declined from fiscal 2004 peak, Gap Inc. was buoyed by Old Navy strength which may have just hit its own revenue ceiling. With its Old Navy split called off, Gap Inc. resumes the challenge of operating a collection of varying brands with a vast store fleet and we expect Gap will remain a revenue shrinker facing external pressures beyond its control.”
In the recent fourth quarter, Siegel said Gap missed on both top- and bottom-line expectations, “with a material gross margin miss as the company felt a 320 basis point pressure from heavy discounting to end the year with clean inventory. He also pointed out that revenue guidance for the 2023 first quarter and full year is below Street expectations.
Zachary Warring, equity analyst at CFRA Research, wrote: “The one bright spot from the quarter is inventory was down 21 percent year-over-year and [Gap Inc.] is now in a manageable position moving into fiscal 2024. We continue to believe shares are overvalued and see many better options in the space with better fundamentals.”