In the money: Buoyant Gap corrects seasonal imbalance
A broadly positive second quarter’s trading, with net profit up 29%, has led fashion retailer Gap to raise its full-year guidance, now predicting earnings per share of US$1.95-2.00.
The headlines from the three months’ trading to 28 July surrounded a particularly strong performance in North America, where Gap, Banana Republic and Old Navy recorded comparable store sales increases of 7%, 7% and 3% respectively.
“That’s the second quarter in a row where the disbursement of our comp was very much driven almost equally across all three of our brands,” said Glenn Murphy, company chairman and CEO.
“That’s very positive. When that happens, our business does very well.”
It was also a good quarter for Gap Direct, which saw sales rise 24%, but Murphy was keener to discuss seasonality when talking to analysts yesterday (16 August) following the announcement of the company’s results.
“One thing that I’ve always been frustrated about is that July and January, in particular, have never been our best months,” he said.
“I think the teams are doing a much better job of reacting to that and putting seasonally more correct product that customers want in our stores this past month.”
And as if to illustrate the point, Murphy gleefully pointed out that July’s overall comp figure was up 10%, outstripping the rest of the trading period.
However, Gap’s international business offers a contrast to the broad positivity of its performance in the US and Canada.
Although net sales were up 7% in the period, this was driven by retail expansion, with comparable store sales falling 5%, mainly thanks to the continued economic fragility in Europe.
“It’s obviously difficult in Europe right now,” admitted Murphy. “But what we feel good about [with] our actual store distribution in the European market is we’re very concentrated in key cities: London, Paris, Milan and Rome is a big percentage of our European business.
“As Europe begins a recovery at some point in the future, I think we’re positioned properly by being much more dominant in those key cities.”
Murphy also pointed to tough comparisons in Japan, where the post-earthquake trading period last year meant much clearing out of spring and summer product and a “very aggressive clearance quarter”.
“I believe that that will be behind us more in the third quarter and in the fourth quarter, and we have expectations that we’ll have a better performance in Japan in the second half,” he said.
Meanwhile, Gap’s forays into China are, in Murphy’s words, “too small right now to be material to our comp number”.
Quizzed on the company’s plans for the market over the next few years, he gave a cagey response, saying it was “a little premature” to talk about what might happen in three or four years’ time.
“We’re going to [open] 30 stores this year – that’s our commitment,” he told analysts.
That expansion will mean Gap entering five new cities, doubling the size of its geographic footprint, by the end of the fiscal year – and helping to make up for any continued stagnation or decline in the company’s European markets.
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