Profit Tumble Puts Wrinkle in Gap Effort
Gap Inc., the nation’s largest specialty apparel retailer, said Thursday that a much-heralded turnaround was getting off to a disappointing start, with flat revenue and tumbling profit in the second quarter and slower-than-expected back-to-school sales.
As a result, the San Francisco-based operator of Gap, Banana Republic and Old Navy chains reduced its earnings forecast for the rest of the year.
Aggressive discounting to clear out summer fashions drove down fiscal second-quarter profit, which tumbled 53%, the company said.
Net income for the period ended July 29 fell to $128 million, or 15 cents a share, from $272 million, or 30 cents, a year earlier.
The company reported sales of $3.7 billion in the quarter, unchanged from a year ago. Sales at stores open at least a year -- a key measure of a retailer’s health -- fell 5%.
The company, which operates more than 3,000 stores worldwide, has suffered same-store sales declines in 23 of the last 26 months.
“The second quarter was more challenging than we expected,” Chief Executive Paul Pressler said during a conference call with investors.
“While we are encouraged by improved performance at Banana Republic, business was tough at Gap and Old Navy as we cleared through summer product,” he said.
Shares of Gap fell 8 cents to $17.30 before the earnings announcement. In after-hours trading, shares tumbled 3%.
After months of falling sales, the company and its embattled CEO pledged to turn things around in the second half of the year with refurbished stores, more appealing merchandise and pumped-up advertising.
Analysts mostly gave high marks to the new fashions at Gap stores, including a renewed emphasis on wardrobe basics such as T-shirts, khaki slacks and updated denim apparel. But they also warned that it could be tough to draw back customers who, uninspired by Gap’s offering in recent years, have been buying from competitors.
Christine Chen, an analyst at Pacific Growth Equities in San Francisco, said she was impressed with the Gap chain’s fall assortment. She believes that if the economy doesn’t take a big turn for the worse, the unit’s fortunes will improve, albeit slowly.
“Because they’ve disappointed people for two years, it’s going to be difficult to get traffic up, and I think the issue here was traffic,” said Chen, who owns shares in the company and rates the stock “neutral.” “You have to win your customers back. Merchandise improvements always lead traffic improvements.”
Wall Street, she added, has already factored in the company’s sales slumps in its year-end earnings estimates. The average per-share estimate of analysts polled by Thompson Financial was $1.11 for the year.
On Thursday, the company said it was shaving year-end profit expectations to a range of $1.08 to $1.12 from earlier estimates of $1.23 to $1.27.
The company has said it would promote fall merchandise, which began arriving in stores last month, with an eight-week television advertising campaign, two weeks more than last year’s back-to-school effort.
The company also has suffered a slew of high-level management departures. Last month, the well-respected leader of its Old Navy division, Jenny Ming, said she was leaving. Old Navy’s 970 stores and website make up 44% of Gap’s revenue.
