Gap brand sales continue to fall short
One analyst believes a turnaround at the Gap brand may not take hold until mid 2016
US retail giant Gap Inc has seen first-quarter sales at its namesake brand fall at a faster pace than analysts had predicted, meaning that a turnaround is not now expected until mid-2016.
Total net sales at the San Francisco-based company fell 3% during the quarter to $3.66bn from $3.77bn. It said the translation of net sales in foreign currencies into US dollars negatively impacted the quarter by around US$90m, primarily due to the weakening Japanese yen and Canadian dollar.
Comparable store sales were down 4%, with a 10% decline at Gap, and an 8% fall at Banana Republic. Old Navy, however, booked a 3% increase.
"Old Navy delivered another quarter of positive comps – building on its track record of three consecutive years of growth," said Gap CFO Sabrina Simmons. "We remain focused on driving improved performance across our other divisions."
During the four weeks to 2 May, comparable store sales declined 12%, with a 15% fall at both Gap's namesake brand and Banana Republic, while Old Navy was down 6%. Net sales declined 9% to $1.21bn from $1.33bn a year ago.
With two consecutive quarterly sales declines at the Gap brand, FBR Capital Markets analyst Susan Anderson said underlying trends are deteriorating more quickly than previously anticipated.
"Given increasing Gap segment deterioration (reflecting lacklustre product, a secular decline in Gap segment traffic following consecutive quarters of weak product, structural price point/industry pressure, and erosion of millennial customer base) and the potential for more gross margin pressure than previously anticipated, we believe a turnaround is pushed further out (potentially mid 2016)."
Meanwhile Stifel analyst Richard Jaffe blamed a "lack of product appeal" on the shortfall in sales at the Gap brand. "In addition, the ongoing weak product appeal is having a negative impact on Gap traffic, compounding the problem in the near term," he said.
"Any real improvement will be incremental and increasingly impactful through the balance of 2015 with a fresh start in 2016."
Earnings in the quarter also fell, declining 8.1% to $239m from $260m in the comparable quarter last year. Gross margin narrowed by 100 basis points.
Anderson said she expects port delays and the Gap brand to pressure second-quarter gross margin, potentially more than expectations, as the company clears elevated inventories.
The company reaffirmed its guidance for full-year 2015 diluted earnings per share to be in the range of $2.75 to $2.80.
Anderson added: "We think full-year EPS guidance is likely achievable, at this point, but could be more reliant on SG&A control and share repos than anticipated at the beginning of the year."
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