Gap Inc. on Thursday reported that first quarter net sales fell 2% to $3.7 billion from $3.8 billion in the year-ago quarter, according to a company press release.
Comp sales in the quarter tumbled 4%, with even typically high-performing Old Navy dragging the metric downward. Old Navy Global comps fell 1% (after last year's 3% rise); Gap Global fell 10% (after last year's 4% decline); and Banana Republic Global comps fell 3% (after a 3% rise last year).
Gross profit fell 6% year over year to $1.34 billion, as gross margin contracted year over year by 140 basis points to 36.3%. But net income rose to $227 million from last year's $164 million, and operating margin expanded by 240 basis points to 8.5%.
Given its struggles in recent years, it's not all that surprising that the Gap brand was ill-prepared to withstand the first quarter challenges befalling many apparel retailers. Weather and some ebbing of consumer confidence appear to have left a lot of clothes on racks, which resulted in price cuts and margin squeezes.
But the trouble that emerged at the company's usually stalwart Old Navy brand led many analysts on its conference call on Thursday to question executives about how prudent the planned spin-off of the discount clothing retailer is, or if the timing makes sense. In February, the company announced it will split into two independent publicly traded companies: Old Navy will stand alone as an $8 billion a year company, with yet-to-be-named "NewCo" comprised of Gap, Banana Republic, Athleta and other specialty apparel brands notching some $9 billion each year.
One issue on analysts' minds is whether Old Navy might suffer once it's severed from the conglomerate's supply chain efficiencies. But CEO Art Peck and CFO Teri List-Stoll pushed back, with Peck insisting that the company would never do anything that would imperil either brand. "I think it would be profoundly short-sighted to question the wisdom of the separation on the basis of a very very unusual quarter," he said on the call, adding, “Consumers don't change their spending patterns overnight. This is eminently explainable."
To be fair, the cool weather that Gap Inc. executives cited as a major reason for soft sales in the quarter was indeed a factor, and not just for Gap. But that doesn't entirely excuse it, either, according to Neil Saunders, managing director of GlobalData Retail.
"The weather did not play ball, consumers prioritized other areas of spending such as on the home and leisure activities, and there was a glut of discounted stock in retail which created a reluctance to pay full price for products," he said in comments emailed to Retail Dive. "Gap was not the only retailer to suffer from these dynamics, but its figures suggest it performed much worse than other retailers leading to the conclusion that the business is still making many poor decisions about ranges and assortments."
The situation leaves Gap Inc. to soldier on with a company split that Wells Fargo Senior Analyst Ike Boruchow called, in a client note emailed to Retail Dive, "clearly ill timed." That Old Navy is slipping is especially troubling, despite its past record of recovering fairly easily from fashion missteps, according to both GlobalData Retail and Wells Fargo.
"Unlike the past 24 months, this is not just a story of a struggling Gap brand, but rather now all 3 concepts in the portfolio (including the all-important Old Navy brand) are comping negative," Boruchow's team wrote. "Given the company's past execution issues, it seems that [Gap Inc.] may have trouble taking on all that is on their plate today — they are now not only trying to inflect their entire portfolio (they've been working on 2 out of 3 for the past 5+ years….), but also working to execute on the spin-off of Old Navy."
The spin-off would be bad not just for Old Navy, but also for the once-iconic namesake, if not more so, according to Saunders. "It is very hard to understand why Gap puts itself through this continual cycle of pain. The business is seemingly inert and is either unwilling or unable to make the necessary changes, or at least try and test new things," he said. "This behavior is highly worrying, not least because when the business is split, Gap's lackluster performance will be more exposed than ever. If the brand continues on its current trajectory — and there is no evidence to suggest it won't — it is difficult to believe it has a sustainable future."