The separation of Old Navy from Gap Inc. is still on, though it will come later in the year than previously planned, interim CEO Robert Fisher said on Thursday, per a Seeking Alpha conference call transcript. The company in a press release also reported that overall net sales fell 2% year over year to $4 billion.
Overall comparable sales fell 4% from a flat result a year ago, the company said. By brand: Old Navy comps fell 4% (from a 4% rise last year); Gap comps fell 7% (as they did a year ago); and Banana Republic comps fell 3% (after rising 2% a year ago).
Net income in the quarter fell to $140 million from $266 million a year ago. Gross profit decreased 4% year over year to $1.56 billion, as gross margin contracted by 70 basis points from last year to 39%.
Art Peck's abrupt ouster earlier this month may have hinted at major changes at Gap Inc., but that notion was quickly dispelled by executives presenting their third quarter report to analysts.
"Surprised" was a common note in several client reports from analysts, with some also indicating disappointment that Peck's departure won't impede the company's plans to spin off its Old Navy business. Wedbush analyst Jen Redding on Friday was among them, and said that, with the company's already challenged brands facing a tough holiday period, "we view the spinoff in addition to the company’s ongoing CEO search as meaningfully distracting."
Roxanne Meyer, Managing Director at MKM Partners, in an email Friday noted that investors had previously expressed skepticism about the wisdom of the separation plan, and that Fisher's description of previously unreported challenges in Gap Inc.'s operations were all the more alarming.
Fisher on Thursday said that "overall complexity that has been building up in the organization over time has led to a lack of focus, operational discipline and efficiency in many areas." To address that, he said he has convened an executive committee to "streamline operating decisions and drive better accountability during this interim period." That group includes Old Navy chief Sonia Syngal and Banana Republic chief Mark Breitbard, who will be responsible for brand leadership. CFO Teri List-Stoll will add operational oversight to her role, and Global General Counsel Julie Gruber will consolidate administrative oversight, he said.
"We were admittedly surprised to learn that the planned Old Navy separation is a go, in light of its current performance and our contention that it will ultimately do more harm than good," MKM's Meyer said. "We believe The Gap, Inc. faces headwinds across brands — it is lacking a clearly defined strategy/roadmap for improvement at Gap and Banana Republic, and we expect ongoing pressure at Old Navy, likely through [the first half of next year]."
Gap Inc. has centered much of its turnaround of the Gap brand on boosting profitability through store closures, but is hitting roadblocks in negotiations with landlords, List-Stoll told analysts. In the quarter the company closed 21 stores, primarily in North America, net of openings primarily in Asia, and now expects 15 net store closures for the year as it accelerates the pace of Athleta openings, plus some Gap outlets in China, she said. The company also plans to exit Old Navy from China in early 2020, she said.
While Fisher and List-Stoll discussed operational difficulties at length, they dwelled less on merchandise, which has been the Achilles heel at Gap and has emerged as a new problem at Old Navy as well. Banana Republic, in yet another surprise, appears to be recovering somewhat thanks to improved assortments, and Old Navy has addressed fashion missteps in women's, executives said.
The Gap brand, while remaining a large enterprise, is losing share, according to GlobalData Retail Managing Director Neil Saunders. "The reason for this is relatively simple: assortments are dull, and every new season Gap churns out more of the same bland product rather than innovating and trying new things," he said in emailed comments. "This makes it very easy for consumers to overlook Gap."
That is making the brand's regular, massive discounts less effective in drawing in customers, he said. And with other retailers resorting to more price cuts in the third quarter and for holiday, that's also a problem for Old Navy's value proposition, he said. But he found some cause for hope with Peck gone saying it "may result in a more aggressive pace of advancement."