Gap restructuring weighs on Q2 as profit falls 34%
- Q2 profit declines 34% to $219m
- Sales down 2% to $3.90bn
- Analyst says Gap a group of “mixed fortunes”
Gap saw its second-quarter profit and sales decline
Gap Inc remains a group of “mixed fortunes”, according to one analyst, after the US retail giant reported a double-digit decline in second-quarter net profit, but said it remains confident of improved business performance.
The retailer's latest results show net income tumbled 34% to US$219m for the 13 weeks to 1 August, compared to $332m in the same period of the prior year, as an ongoing restructuring takes its toll.
Gap Inc announced in June that it would shutter 175 Gap stores in the US and axe 250 head office jobs as the company tries to increase profitability and speed decision-making at its struggling namesake brand. Its plans also include a new approach to product development – dubbed ‘Product 3.0’ – underpinned by a responsive and seamless supply chain.
During the quarter, sales slipped 2% to $3.90bn from $3.98bn last year. Comparable store sales fell 2%, weighed down by a 6% decline at the firm's namesake brand, and a 4% fall at Banana Republic. Old Navy, however, rose 3%.
Gross margin was down 200 basis points to 37.4%.
Nonetheless CEO Art Peck said: “I remain confident in our strategies to improve business performance and drive loyalty going forward. Our evolving product operating model is laying the foundation to more consistently deliver on-trend product collections across our portfolio.”
Conlumino analyst Håkon Helgesen said Gap "remains a group of mixed fortunes," adding: "However, management now seems to be getting to grips with some of the issues in a way that has hitherto not been the case.”
Delving deeper into the Gap brand, FBR & Co analyst Susan Anderson noted: “We like Gap's fleet optimisation, streamlining, and responsive supply chain initiatives, but we believe it may take time to regain the customer and gain traction with a refreshed image (potentially late 2016/early 2017).
“In the interim, Gap is managing inventories tightly (controlled buy levels for holiday but not design) to stem merchandise margin pressure; however, continued demand declines could remain a headwind.”
While Stifel analyst Richard Jaffe added: “While results will be challenging in the near term, longer term the company has significant opportunity for improvement.”
For an earlier insight into the changes underway at Gap, click on the following link: Product 3.0 underpins Gap brand turnaround plans.
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