Gap sees Q2 improvements in ongoing turnaround
Gap Inc. on Thursday reported that quarter two same-store sales rose 1%, up from the 2% decline in the year-ago period. Q2 net sales fell to $3.80 billion from $3.85 billion in the year-ago period, with currency translation hitting that by about $37 million, according to a company press release.
Old Navy continued to be a boon, but all brands rose in the quarter, according to a company press release: Old Navy Global same-store sales rose 5%, up from flat sales last year; Gap Global fell 1% percent, up from its 3% decline a year ago; and Banana Republic Global fell 5%, up from the 9% decline in the same quarter last year.
The company’s operating expenses in the quarter fell to $1.03 billion from $1.16 billion last year, boosted by a $64 million gain from insurance proceeds related to the Fishkill fire recorded in the quarter and the fact that restructuring costs of $135 million were recorded in the year-ago period. Excluding those, operating expenses were up about $70 million, primarily driven by an increase in payroll, largely due to bonus, as well as long-term investments in digital and customer initiatives. Operating margin for the quarter rose to 11.9% compared from 7.2% last year and adjusted operating margin fell to 10.2% from 11.1%.
CEO Art Peck on Thursday told analysts that the company’s third straight quarter of same-store sales growth were thanks to long-term investments and a store-count correction that were paying off. He distanced the company from malls, saying the notion that the company is a mall-based apparel retailer is "one dimensional probably at best, but really, it's just flat out wrong," according to a conference call transcript from Seeking Alpha.
"[We’re] focused on driving improved performance and cash flow generation and at the same time, responsibly and aggressively managing our exposure to struggling mall real estate," he said. "[A]s you get into the C type malls, I think, we and other people pretty consistently see the fact that traffic is tougher there," he said, pointing out that the company’s flagship and outlet stores include many stand-alone stores. "That all said, those are the types of malls where we have continued to reduce our exposure over time, and we will continue to do that on a going forward basis."
The company ended the second quarter with 3,642 store locations in 47 countries, of which 3,179 were company-operated, and expects its store count to be about flat at the end of the fiscal year 2017 compared to last year.
Despite the improvements, GlobalData Retail Managing Director Neil Saunders said he remains skeptical of the company’s ongoing progress, noting that Old Navy’s continued strength is masking underlying troubles at its other brands. "Although we believe growth could soften at Old Navy as it starts to come up against tougher comparatives, we remain broadly confident about the brand," he said in an email to Retail Dive. "We are also encouraged by the fact the company is testing a new smaller 8,000 square foot format, which we think could help Old Navy to expand into locations that would not support a larger footplate."
But outside of Old Navy and the company’s smaller Athleta brand, Gap and Banana Republic are not resonating with consumers, according to GlobalData Retail research. "We recognize that steps have been taken to improve Gap's ranges and make marketing more compelling," Saunders said. "We also applaud the continued progress in areas like activewear. However, the general impression is still that of a rather dull brand that relies on excessive discounting to sell bland merchandise. From our consumer data, it is clear that most shoppers have a similar perception. In essence, much more work is needed to revive the Gap brand."
New Banana Republic chief should be given time to turn that struggling unit around, but Saunders said there’s been little progress so far: "[W]e see little progress to-date, with collections in stores still off-pitch and overpriced."
Peck pointed to Banana Republic's new Rapid Movement Chino and Saunders admitted that it was "innovative," but slammed the execution as poor and the $98 price point as too high. And the brand’s new brand ambassadors will not "have much impact unless Banana finds a cohesive and relevant brand identity," Saunders said. "Ultimately, success comes down to having products people want and are prepared to pay for."
The company reiterated its expectation that same-store sales for the year will be flat to up slightly and net sales fall slightly below that, driven by an expected negative impact from foreign currency fluctuations and the impact from international store closures last year.
Despite those negative effects, Peck emphasized the overall financial health of the company and its ability to expand margins, and asked analysts to "do the math." "[W]e will continue to be aggressive and disciplined cost managers," he said. "It's a very compelling value creation story that we are confident we can deliver."
Saunders is less confident. "[W]e are more confident about Gap now than we were a year ago," he said. "However, we remain skeptical that management has the proper strategies in place to bring about a strong revival across the whole business."
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