Gap Inc. on Thursday reported that second quarter net sales fell 2% year over year to $4 billion.
Comparable sales in the quarter fell 4% compared with a 2% increase last year, according to a company press release. By brand Old Navy comps declined 5%, Banana Republic comps fell 3% and Gap brand comps were down 7%.
The company’s net income in the quarter fell to $168 million from $297 million in the year-ago quarter, as gross profit fell 4% to $1.56 billion. Gross margin declined 90 basis points year over year to 38.9%, and operating margin declined 270 basis points to 7%.
Gap Inc. leans on Old Navy to lift its overall results, but the discount brand has been struggling to deliver in recent quarters. That complicates the company's plan to spin the banner off to please investors.
Wells Fargo Senior Analyst Ike Boruchow called the depth of Old Navy's comp decline "surprising," noting that it was the "worst performance since 2016" and that comps there have now decelerated for four quarters straight. Also of concern, he wrote in emailed comments, is that the company's discussion about its plans and expectations for the once-dependable brand "feels rather similar to the years-long narrative surrounding the beleaguered Gap brand (top-line weakness met with future hope as inventory gets refreshed), and we remain concerned at [Old Navy's] ability to right their ship in time ahead of holiday."
The brand's struggles this year also call into question the advisability of a spin-off, Wells Fargo analysts said.
Meanwhile, the company's namesake brand continues to falter, as it has for five years, they warned, citing "a rotation of design leadership (3 creative directors in 4 years, a new Gap CEO in 2018) and marketing missteps," disruptions from "fast fashion, e-commerce, re-commerce wallet share shifts away from apparel," and general price pressures on mall-based apparel retailers.
GlobalData Retail research finds "that shoppers are in retreat from Gap," with the effectiveness of such discounts waning, according to a note from Managing Director Neil Saunders. "Over the second quarter, some of this may have been down to the generally elevated level of discounting in the apparel market, but we also attribute the complete dearth of newness and inspiration within Gap ranges for the decline in shopper numbers," he said.
"None of this is new. It is an old story that has been told time and again," Saunders said. "However, our fear is that instead of bottoming out, the declines at Gap could accelerate if the consumer economy softens. When money is tight it is very easy for consumers to avoid spending at retailers that give them no compelling reason to do so – and Gap fits perfectly into this category."
Gap Inc. CEO Art Peck told analysts on Thursday that the company is looking seriously into rental and resale as a customer acquisition tool. The company's Banana Republic brand a week ago announced it will launch an online women's apparel subscription service in the U.S. called Style Passport at the end of September, with plans to add men's apparel "at a later date." The market's appeal is linked to sustainability and fondness for vintage finds, he said, according to a transcript from Seeking Alpha.
But Saunders is skeptical. "While Banana remains a shadow of its former self, there is reason to believe it is on the road to recovery. That said, we do not think much of the initiative to get into the rental business," he said. "For a brand of Banana’s price and position, we do not see rental as the right solution and believe the company would be better advised to continue focusing on developing compelling products and rebuilding its reputation."
Although it remains too small to carry much water for the company, the athleisure brand Athleta appears to be replacing Old Navy to some extent in providing superior results. The business accelerated since the first quarter, and the company is "on track to end the year with 185 Athleta stores and we’re accelerating store openings with approximately 25 new stores this year," Peck said.
Beyond that promising tactic, the company doesn't have much of a strategy, however, according to Saunders. "Overall, the high-level view is that Gap is a company in retreat," he said. "Its profits and sales are in decline and it doesn’t seem to have many credible plans to reverse that position."