In the past, Gap (GPS) execs have always managed to instill a sense of hope.
When I first started covering Gap GPS in the early 2000s, former CEO Paul Pressler (and Disney (DIS) store exec) would hop on earnings calls and suggest the company was only a quarter away from greatness. Then that quarter came, and it was more of the same -- ugly sales declines. Pressler's stay at Gap was short.
Then Glenn Murphy -- who led a mini revival of Gap in the late 2000s by focusing on skinny denim and cost cuts -- would get on earnings calls and sack his creative team for any slight miss on style and fit. Still, he had a confident way about him (if not annoyingly arrogant in person) even as sales continued to err on the side of depressing. Murphy finally had enough a couple years ago (and in hindsight, left Gap in horrible shape in terms of operating structure and exec talent) and handed the reins to Gap's head of digital, Art Peck.
Peck has tried to mirror those Gap CEOs before him by sounding confident on earnings calls in the face of pretty bad financial results. The latest attempt at staying defiantly upbeat was Thursday evening, just as Gap reported another same-store sale decline despite a broader industry rebound in apparel due to warm weather. I really listened to Peck on the call and have to say, the man might be delusional. He called minor wins in women's suede offerings as potentially leading to a Gap brand revival this year.
On the other hand, Gap's long-time CFO waxed poetic about the possible traffic boost from Gap actually marketing its brand in the back half of the year (Gap's narrow earnings beat was fueled by a pullback in marketing). Peck also frequently chimed in on the company's sales potential in stretch products, as if they haven't been done for the past five years at other retailers.
The bottom line remains this: Gap remains in horrible shape, and the long-term outlook is bleak. Suffice it to say I wouldn't be a buyer of the stock today, Monday or any other day. Here are some worthwhile takeaways from the quarter.
Gap Is Losing to Department Stores
Department stores continue to do a great job at offering the style choices that were once reserved for specialty retailers such as Gap. J.C. Penney (JCP) is crushing it in men's, women's and kid's offerings. The clothes actually fit well, too. Moreover, the department stores -- and even off-price retailers such as TJ Maxx (TJX) -- continue to undercut Gap on price. This entire backdrop is bad news for Gap, as it could never command full price, especially as it's dealing with persistent style and fit issues.
Not Enough Product Wins
It was pretty amazing to hear Peck being so upbeat, since the entire company is having very little product wins. Suede? Lace tops for females? Those were the only things called out by Peck as being wins for the Gap division. Banana Republic apparently has some stain resistant men's pants that people seem to like. As for Old Navy, who knows.
All in all, the company is an apparel retailer that needs people to actually like its style and fits in order to drive consistent top and bottom line results. Peck did nothing to suggest the company was headed toward serious product wins this fall. The company could market its butt off, but if it doesn't have the products, the investment will be for nothing.
Impact of Department Store Closures
Peck sidestepped an analyst question about the impact of mass stores closures by department stores such as Macy's (M) . I will answer the question for him: Gap is in serious danger of another sales plunge in 2017, as traffic-driving anchor stores go away. The company will likely announce a good number of store closures next year, in an attempt to not be left in zombie malls. Not sure how the market will take this announcement, but in effect Gap will be vacating people's lives just as online thrives and fast fashion grows.
