Gap Shares Tumble 14% Amid Earnings Decline
Shares of Gap Inc. fell about 14% on Thursday after the apparel retailer posted a 6% decline in earnings and once again cautioned that sluggish sales and slower traffic at its Old Navy stores could hurt profit for the rest of the year.
The San Francisco-based company said net income fell to $183.9 million, or 21 cents a share, in its fiscal second quarter, from $195.8 million, or 22 cents, a year ago. Total sales grew 20% to $2.95 billion, but sales at stores open at least a year declined 2%.
Wall Street analysts, on average, were expecting earnings of 20 cents, according to First Call. Those estimates were revised after last week, when the company gave its second profit warning for the quarter.
Most U.S. retailers have run up against difficulties in recent months, as unseasonably cool weather in many areas, higher gasoline prices and a lag in consumer spending dampened sales. Still, Gap’s woes have been exacerbated by what analysts said was a misjudgment in its fashion focus on teen consumers and an inventory crunch at Old Navy, which contributes 35% of Gap’s sales.
Gap shares tumbled $4.50 to close at $27 on the New York Stock Exchange, marking a new 52-week low for the company as weeks of logistical problems, lagging sales and two previous second-quarter profit warnings took their toll.
The company said it does not see an immediate turnaround in its problems with Old Navy and, given the volatility in the sector, said third-quarter earnings may fall to or below the 35 cents a share earned one year ago. That’s well short of the 41 cents a share analysts expected.
The company also warned that fourth-quarter earnings might be “slightly lower” than analysts’ consensus estimate of 57 cents.
“Clearly we’ve had a tough and disappointing second quarter,” said Chief Executive Millard Drexler. “It’s very early to predict the quarter as it’s only a week-and-a-half into the new season. But it’s difficult to know where exactly we’re going.”
The company admitted it may have sold itself short by skewing its merchandise toward the teenage crowd at the apparent expense of older consumers who may have been driven away from Old Navy stores because of the lack of selection.
On Aug. 3, Gap said earnings for its second quarter may fall short of expectations because of weak sales. The warning sent Gap shares tumbling and trimmed about $7 billion from the company’s market value.
Drexler said the company’s second-quarter results were dampened by “heavy promotional activity and a meaningful decline in traffic” at the company’s Old Navy stores, as well as logistical problems with merchandise delivery.
The company also said Thursday that it increased the number of stores it plans to open during fiscal 2000. It plans on opening 130 to 140 new Gap International stores, up from the 120 to 130 previously planned, as well as 150 to 160 Old Navy stores, up from the 120 to 130 previously planned.
Gap operates about 3,300 stores worldwide under such brand names as the Gap, Baby Gap, Gap Kids, Old Navy and Banana Republic.
As a result of the additional stores and the expansion of its catalog and Internet operations, the company said it expects capital expenditures will be $1.8 billion, up from its previous $1.6-billion estimate.
