Gap’s second quarter sales decline reflects ‘a company in retreat’

Gap’s second quarter has proven to be mostly a continuation of the first, with negative results across nearly all segments of the business. 

This is hardly surprising as the fundamental trading strategy has not shifted, so there is little reason to expect a different outcome. In this context the CEO’s assertion that Gap is “running towards” the next step in its evolution is rather misleading. In our view, the company tends to move at what can best be described as a glacial pace.

As usual, the main issues come from the Gap brand where global comparable sales fell by a sharp 7 per cent, a figure made all the worse by the fact that the decline comes off a 5-per-cent dip last year. Within the US, total sales at the Gap brand dropped by 11.4 per cent. 

Some – but by no means all – of this was down to store closures. However, on an underlying basis it is very clear that Gap’s products remain firmly out of fashion with consumers. GlobalData Retail’s research shows shoppers are in retreat from Gap and – worryingly – discounting is becoming an increasingly ineffective tool in drawing them in to stores and online even to browse. Over Gap’s 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.

None of this is new. It is an old story that has been told time and again. 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.

Old Navy, which usually comes to the rescue of the group, also had a bad quarter. On a global basis, comparable sales slid by 5 per cent. Within the US, total sales were down by a more modest 1.2 per cent. Most of the blame for the softness could be attributed to market dynamics, which remained poor over most of the second quarter. However, from store visits some of the product missteps from early in the year were not corrected and the assortments going into the summer selling season were less compelling than usual. 

There is scope for Old Navy to make the necessary corrections as it heads into fall, but a bad third quarter will throw up major questions as to whether the brand has lost its once golden touch. This would be a disastrous prospect for Gap as it looks to spin off the business.

Fortunately, there were some better numbers from Banana Republic, at least within the US where total sales rose by 3.1 per cent. Improvements to quality and some better pieces within the assortment have helped to lift conversion and basket sizes from existing customers. While Banana Republic 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. For a brand of Banana Republic’s price point 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.


Away from the big three brands, there are clear signs of progress with Athleta which is growing rapidly thanks to new store openings and good brand traction. This business has good forward potential and over the next few years should make a more meaningful contribution to the company’s growth and bottom line.

Overall, the high-level view is that Gap is a company in retreat. Its profits and sales are in decline and it doesn’t seem to have many credible plans to reverse that position.

Comments

Comment Manually

x

SUBSCRIBE
FREE NEWS BRIEFS Get breaking news delivered