Gap booked what analysts called a "modest" gain in its fourth-quarter and a double-digit decline in full-year earnings last week

Gap booked what analysts called a "modest" gain in its fourth-quarter and a double-digit decline in full-year earnings last week

Gap Inc has admitted progress has been slower than expected, despite some bright spots in its last fiscal year, as the US speciality clothing retailer looks to rebuild, get its product back on track, and utilise what it says is a "significant" opportunity to gain market share.

The San Francisco-based company, which operates over 3,300 stores, booked what analysts called a "modest" gain in its fourth-quarter and a double-digit decline in full-year earnings last week. CFO Teri List-Stoll was optimistic, highlighting the "many opportunities ahead to position the company for long-term growth".

Speaking on Gap's earnings call, however, CEO Art Peck admitted to analysts there has been "period-over-period" improvement in key places in the business, but said "heavy lifting" is continuing to transform the company's operating model, its product, and its responsive capabilities.

"When I took over two years ago, we and I knew our performance wasn't where it needed to be. We knew that we were in an industry that was changing dramatically. And looking back on it now, I think we probably all underestimated the magnitude and speed of the changes taking place. It's been pretty stark what's been happening over the last year as we've looked at – some competitors have exited the market.

"I'm pleased with the progress that we've made, but we are in a market that is in significant disruption."

Old Navy was the only division to report comparable store sales gains in 2016, at 1%, while for the Gap and the Banana Republic brands, comparable sales were down 3% and 7%, respectively.

Gap books "modest" Q4 gain but FY profit tumbles

Peck said he was "disappointed" with Banana Republic's performance and has been taking advantage of the time being used to find a leader for the division to "roll up" his sleeves and "get into the business personally and understand what's going on".

"That's really what I'm focused on right now, which is taking the next steps and taking them quickly to continue to turn the business around. I'm not pleased with the performance. [But] I do believe there's a lot of potential in the brand."

Gap has been working to bring the brands more in line with the different ways consumers shop, including giving store employees mobile devices to check consumers out in store aisles, the introduction of its first Old Navy mobile app, and the launch of its virtual DressingRoom app.

Gap unveils virtual dressing room app

Peck says the disruption taking place in the market should work in Gap's favour. The company's "structural advantages" in terms of size and scale along with improvements it has made on "product and experience" present the company with "a significant opportunity to consolidate and gain market share".

Supply chain responsiveness

Gap, which operates ten distribution centres in North America, has been moving to a demand-driven buying model and has moved the majority of its categories onto a responsive operating model in order to react more quickly to key trends.

The company has been working to "rebuild", get product "back on track", re-establish a path for its key brands, and find the equilibrium between stores and online in a bid to improve productivity and achieve a leaner cost structure.

As part of those plans, Gap is now utilising the excess capacity in its distribution centres that supply its slumping stores to fulfill online orders. Having traditionally run with separate direct distribution for its online customer and retail stores, Gap is now looking to utilise its space more effectively.

"We have the luxury of having large retail distribution centres that are not fully utilised, and the work we're doing right now, number one, is an investment avoidance issue where we need to continue to add direct distribution capacity," Peck told analysts on the firm's earnings call last week.

"We're actually doing the work to convert the retail distribution centres to be able to ship both direct and retail fulfillment out of one pool of inventory and one distribution centre."

This, Peck says, would allow Gap to avoid incremental asset investment in new buildings, and allow it to leverage and be "very flexible" with one pool of inventory.

"We are part of the way through that. We have a clear plan for making that happen. There was a slight setback associated when we had the Fishkill fire, but not significant and we'll make material progress on that in 2017 and plan to wrap that up in early 2018."

Peck pointed to the progress Gap has made in the supply chain by cutting development cycles for many categories of products from ten months to 8-10 weeks. The company has also moved to a single platform for its new demand-based buying model, that can be used across all inventory, pricing, assortment building, and in-season management. Implementation is under way.

Product adjustment

Looking ahead to the new fiscal year, Peck says the focus will be on ensuring Gap gets its product right.

"I've said it many times and I'll say it again, because it is foundational, we are a product company and we are a retailer. And if we don't get our product right, we will not win regardless of how good we are in digital or many other things. It starts with emotional product that she connects to that has the right quality, the right fit and the right value proposition.

"This is a journey. It's one that we're approaching with urgency, with determination. I'm a realist. I can see where we have made mistakes, and I can see where I can get very excited as the proof points begin to materialise. My money is on Gap, not only to survive this changing environment that we're in, but to emerge a very clear winner."