In life, timing is everything.
And I am sure glad I penned a very bearish piece on Gap (GPS) for Real Money earlier in the week after seeing some cracked-out bullish sell-side notes. Shares of the struggling specialty apparel retailer plunged close to 10% in after-hours trading on Thursday following horrid March sales. Same-store sales nosedived 6%, and the commentary I heard on a pre-recorded call offered zero reason for optimism. Again, no surprise to this guy.
Here are my takeaways:
-- The company did not drive the sales build around the Easter holiday that it had planned. As I noted in the original story, Gap brand's offerings throughout the month were awful. The colors for both men and women were absurdly bright and basically summer focused during a period of generally frigid temps across the country. Men's in particular was the most boring assortment I have seen from Gap in some time. Sales fell 3% in the month. While the company noted on the call that people are responding well to its spring assortment, I think that is typical executive "thinking in their own bubble" type of stuff. The company said store traffic was weaker than its lower comp, which is very alarming as we look into the critical back-to-school selling season. I continue to believe Gap brand has to close more stores than it articulated to Wall Street last year.
-- As a result of weak sales, Gap has entered April with more inventory than it expected, which will place pressure on first-quarter gross margin (which is part of the reason shares are falling -- the market is baking in a nasty earnings miss). I think the inventory pile-up will hurt Gap's chances at properly showcasing its summer assortments, which it has been hyping pretty much since late last year as the drivers of a long-awaited turnaround, most notably at the Gap division.
-- Banana Republic comp decline of 14% is straight-up alarming. I have no other commentary to add here.
-- Gap now has a serious credibility problem with Wall Street.
I don't think you should touch Gap's stock with a 10-foot pole. That said, I would start to watch it in the coming weeks for unusual volume -- Gap is being very mismanaged, and an activist may want to get involved to facilitate needed change (especially after this new stock plunge).
Long-Term Concerns on Gap
Leadership: Gap's relatively new CEO, Art Peck, has not proven he could reinvigorate the brand (see March sales). In my view, the stock has unduly traded higher on the ambitious hope Peck drives a spring turnaround at Gap and Banana Republic, while not allowing Old Navy to fall off the map following the loss of a key executive to Polo Ralph Lauren (RL) late in 2015. Frankly, I don't think anyone could save the Gap division -- it has long been in a period of steady decline that is unlikely to end well in my lifetime. Sales so far this year reinforce this point.
Monthly sales releases: They continue to point to horribly weak sales on a global scale. All of the releases so far this year reek of a retailer struggling to find a place in the hearts of consumers, not one on the comeback trail (I encourage you to look at how the sales trends are changing for the better at Abercrombie & Fitch, an example of a retailer headed for a turnaround). I think investors will be wise to remain focused on Gap's weak sales -- the market is likely to dump its hope for a spring sales revival and assess Gap for what's really happening. That hope dump is occurring after hours today.
Online sales: Amid the ongoing boom of online shopping, Gap's online sales have basically gone nowhere in recent years. Gap's online sales of $2.5 billion in 2015 were unchanged year over year, and up marginally from $2.3 billion in 2013. That is laughable, worrying and flat-out weird. By comparison, Lululemon's (LULU) online sales rose 25% in 2015. Nike's (NKE) online revenues surged 56% for the three months ended Feb. 29. Even the world's largest retailer, Wal-Mart (WMT), saw better online sales growth than Gap in 2015 -- global e-commerce sales rose 12%.
Bottom line is that if a retailer is not growing strongly online in the age of digital, there is something fundamentally wrong with the company; don't invest in it until trends are reversed.
