Commentary: Future of Gap brand uncertain if it continues on current trajectory

Gap has started its fiscal year with a sobering set of numbers that show the business is still spluttering and stumbling as it aims to rebuild brand equity with consumers. Total sales slid by 2%, dragged down by a terrible performance at Gap where U.S. revenue fell by almost 11%. Old Navy fared better with a 3.2% rise in U.S. sales, but this was mostly due to an increase in store numbers. On an underlying basis, Old Navy’s comparable sales fell 1%.

On the bottom line, the numbers do not look so bad – at least on the surface. Despite a 140 basis point decline in gross margin, operating and net income both increased by 38%. However, these numbers are flattered by adjustments to take out various costs, including those associated with the planned separation of the brands. They also include gains on the sale of property. When the adjustments are stripped out, operating income fell by 43% and net income by 45% – which provides a much truer reflection of the dismal state of affairs within the trading operation.

To be fair to Gap, demand for apparel was weaker over the first quarter. 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. 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 Gap brand is an excellent example of this. Every quarter management claims that products are improving and that the business is responding to changing consumer demand. And yet every season, Gap churns out the same bland range of undifferentiated product which has barely changed over the past 20 years. When consumers don’t respond to the mundanity, the discounts kick in. These have now become so commonplace that even reductions of 50% or more fail to thrill shoppers.

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. 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.

Gap wasn’t the only brand suffering this quarter, the usually robust Old Navy also posted negative comparable sales. We are inclined to believe that this is more a function of external factors than of serious missteps within the business. However, from our store visits we found ranges across the first quarter pretty underwhelming, which no doubt contributed to the lack of interest. Old Navy has been through these dips before and has subsequently rebounded, so we do not see the current performance as being a major cause for concern.

The weaker demand across all banners left Gap with $2.24 billion of inventory, a worrying 10% more than it had at the same point last year. This will need to be shifted which will hinder full price sales and further weaken margins. Such a glut nicely symbolizes what Gap has become: a retailer trying to shift a lot of stuff which is not particularly appealing to consumers.