Women's business continues to drag on Gap
"We need to get better right away in our women's product," Gap says
With its turnaround efforts continuing to be hampered by the stagnant economy, markdowns, and rising product prices as the higher cost of cotton puts pressure on margins, specialty clothing retailer Gap Inc has yet another thorn in its side: women's wear.
"If you look at the key categories at Gap Inc, kids and baby did not negative comp in the quarter. Men's did not negative comp in the quarter. So really, it's our women's business that's a drag on the total company's performance," CEO Glenn Murphy told analysts yesterday (18 August).
Speaking on a conference call to discuss the retailer's second quarter results, he said: "We need to get better right away in our women's product. We understand that, our teams understand that, we need to have great products in our stores."
It's not the first time he's expressed his disappointment at a lack of progress in the retailer's plans to include more fashion in its line-up, and that efforts to update its merchandise have so far failed to boost sales. In particular, troubles continue to persist at its namesake line. "We need to perform better at Gap brand," Murphy confirmed.
Indeed, in February this year Murphy introduced a raft of changes to the retailer's North American management team, replacing president Marka Hansen with Art Peck, former head of the outlet division, as the Gap unit's boss.
He has also set up a Global Creative Center in New York, headed by Pam Wallack, the former president of Gap Adult North America, with input from divisional presidents based in London, Tokyo, Shanghai, and San Francisco. It main aim is to improve performance and execute one global design vision for Gap brand around the world.
But it would seem progress is slow, with the new team's products not set to hit stores until next spring.
The CEO's turnaround efforts are also being weighed down by what he describes as a "lumpy" economic environment, which is hurting its North American business especially hard.
Deep discounting, higher production costs and flat or falling same-store sales across all divisions drove second-quarter profit down by 19% to $189m in the three months to 30 July. Same-store sales slipped 2% - with a decline of 3% at Gap North America, a fall of 2% at Banana Republic North America, and flat comps at Old Navy North America.
"We've negative comped two quarters in a row now, and that's not good performance and it certainly is below our standards," Murphy said.
His frustration is magnified by the fact that the performance of other retailers and brands shows "there's business out there in the US market."
Supply chain efforts taking shape
Despite struggling to reconnect with shoppers during the critical back-to-school holiday shopping seasons, Gap stuck to its full-year earnings forecast of $1.40 to $1.50 a share.
But CFO Sabrina Simmons warned that while a focus on targeted price increases and promotions would help lift unit sales, this would not be enough to offset the average unit cost increases, which are up about 20%. "Therefore, our guidance reflects significant pressure on our margins."
And Murphy added that mixed news on the economic front means "we're thinking the sentiment in the back half relative to the first half will be neutral at best."
But some efforts to get closer to customers seem to be paying off - including moves to speed product development from concept to store. The core pipeline has been cut by one-third, while the "speed pipeline" is 40% fewer weeks than this, enabling the retailer to make better decisions on fashion and trend, inventory buys, and allocations to stores.
And on the supply chain front, there has been progress on working more closely with vendors - and directly with mills to get better deals on cotton and yarn prices - to turn products around quickly from order to store. There is also some consolidation across its supply base as it leverages its volume as Gap Inc, offering up its entire book of business as opposed to individual brands and styles.
And there is relief too as the price of commodities comes down from an all-time peak earlier this year in time for spring 2012 buys.
But Simmons cautions: "It's important to remember though that for spring 11, cotton was probably $0.90, $0.95 and today you're looking more like $1.05, $1.10. So it's still up year-over-year.
"We would certainly hope when we anniversary the very sharp peaks we experienced for fall and holiday next year, we're going to look at some significant easing. But again, these are volatile times in the market, so it's too early to say."
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