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Commentary: Gap management talks a better game than it is actually playing

Neil Saunders, analyst, GlobalData Retail, comments below on Gap Inc.’s first-quarter sales results, in which the chain posted a 9.9% increase in total net sales.

Although Gap's headline first-quarter sales growth looks very strong, the reality is that it is inflated by both currency gains and a change in the way revenue is accounted for. As neither of these things reflects a true upswing in trading, it is necessary to strip them out to get a realistic appreciation of performance. When this is done, the 9.9% growth rate translates into a more subdued 4.7% increase. This isn't bad, but it is not quite so robust - especially when it comes off the back of a weak prior year comparative.

The more lackluster headline sales number is reflected in the comparable sales figures. Here, Old Navy posted an increase of 3%, Banana Republic an increase of 3%, and the Gap brand a decrease of 4%. In our view, this is a mixed set of numbers that underlines the fact that Gap still has a very mixed set of brands some of which need a lot more work than others.

Starting with Old Navy, the 3% uplift seems subdued, but it comes against an 8% increase in the prior year. Moreover, we believe that the colder start to spring knocked a percentage point off comparable growth. In this context, the actual result is a good one. Our data show that the Old Navy proposition is still resonating with consumers, particularly the family demographic. Sharp prices and some solid fashion edits are helping to drive visitation and conversion.

Banana Republic is in an interesting position. Its growth would suggest that it is performing rather well, however, it is too early to say why this is. It could be because sales are finally bottoming after a very long run of weak performance. It could be because existing customers are spending a little more thanks to the buoyant economy. Or, it could be because some of the changes being made under the new leadership are gaining ground. The reality is that it is likely a mix of all three factors, but we maintain our view that it is too early to call Banana's recovery sustainable.

Moving to Gap, the company has been keen to highlight this as a success story, especially following last quarter's flat same-store sales numbers. However, as this quarter's 4% decline in comparables shows, there is a long way to go before Gap is back to full health. The blunt truth is that on the ground little seems to have changed at Gap. The product mix still consists of the same boring basics, there is an absence of fashion trends, base prices remain out of kilter, and discounting is rife. While Gap's management notes that the brand is in transition and discounting is necessary to sell down excess inventory, we are not confident that the strategy is anywhere near optimal. In short, Gap is still a brand struggling for relevance.

While the main brands are mixed, performance at Athleta is strong. Gap deserved credit here as it is navigating a crowded market in which athleisure and fitness sales have softened. We believe that good product innovation along with solid marketing and strong in-store merchandising have all helped boost revenue. The girlswear part of Athleta has also likely benefitted from the withdrawal of Lululemon's Ivivva concept from physical locations. In our view, this concept has very good forward potential.

Overall, we believe that Gap is in a better position than it was a year ago. However, we also believe that management talks a better game than it is actually playing.
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