Comparable store sales at the Gap brand tumbled 10% in the first quarter

Comparable store sales at the Gap brand tumbled 10% in the first quarter

While new Gap Inc CEO Art Peck has a laser focus on fixing the Gap brand’s woes, finding the right formula is proving elusive. Indeed, a turnaround is not now expected until mid-2016, with the spring season seen as a "no excuses moment."

There’s no doubt Art Peck has his work cut out. Presiding over his second quarterly earnings results since taking over as chief executive officer in February, he is now facing up to the challenges of breathing new life into the fashion retail giant in a rapidly changing environment.

And it doesn’t make for pleasant reading. Total net sales at the San Francisco-based company fell 3% to $3.66bn from $3.77bn during the first quarter to 2 May. Comparable store sales were down 4%, with a 10% decline at Gap and an 8% fall at Banana Republic, partially offset by a 3% rise at Old Navy.

Earnings were down 8.1% to $239m from $260m a year earlier, and gross margin narrowed by 100 basis points.

Some of the underlying issues continue to remain outside the company’s control. Indeed, CFO Sabrina Simmons explained that delayed receipts due to the long-running and recently resolved industrial dispute affecting US West Coast ports – which meant fewer units were available for sale in the company’s stores – are likely to continue to weigh on the second quarter as late units will have to be sold at lower margins.

Likewise, the strong dollar is having a major effect on Gap’s international earnings: the Japanese yen and the Canadian dollar have both depreciated by 30% over the past two years – a significant factor for a company with combined sales of over $2bn in Canada and Japan. The translation of net sales in foreign currencies into US dollars negatively impacted the quarter by around US$90m.

While there’s little Peck can do to counter the continuing fall-out from these "macro issues," he is also increasingly candid about the challenges facing him as he succeeds former CEO Glenn Murphy.

"I’m not proud of our product," he says.

"I continue to be disappointed, but not surprised by Gap's performance," he adds. Specifically, it is the women’s business that is causing most concern, although "the entire performance of the brand," is below par.

"I believe we have diagnosed it correctly having to do with being off-brand, in some cases off-trend, and I can promise you that the team is all over it."

This team includes Wendy Goldman, who has returned to the company in the new role of head of design and product development for Gap.

But product cycles mean 2015 product lines are "mostly bought" and, while some modest changes are possible to holiday assortments, the real impact on Gap brand product is not expected until spring 2016.

On top of "running the business aggressively in season, "we're working extremely hard to make every improvement that we can to the outlying seasons including holiday and most importantly, spring," Peck says. "We've actually taken the step of cancelling some [holiday] styles that we had and we knew were just not saleable."

But he also points to the spring season as being a "no excuses moment."

"I have seen some encouraging elements of the [holiday] assortment that I think are in a much better place. But I'm really putting my big expectation on spring."

On top of this, "we're working very hard to change the product processes…in order to get Gap to a more consistent on-trend, on-brand footing."

Responsive supply chain
Ongoing efforts to build a more responsive supply chain, including fabric platforming, vendor-managed inventory, rapid response, and test and respond are already paying off at Old Navy, which "delivered another strong quarter on top of three years of growth" thanks to its trend-right product.

The challenge, of course, is to take the learnings from Old Navy and transplant them to other parts of the business – which is perhaps easier said than done.

Fabric platforming, in particular, allows the company to leverage its scale and drive average unit cost (AUC) savings by consolidating its fabrics across brands and negotiating directly with mills. It also enables it to respond quickly within a season, and drive simplicity.

Vendor-managed inventory, in which key merchants keep a pool of finished goods they can draw on for replenishment, is targeted at longer-life products and enables better in-stock levels.

Rapid response, meanwhile, is aimed at seasonal products so the company can read demand and react to the colour, size and silhouette customers are buying. This can help take the volatility out of investments, allowing it to shift the assortment from under-performing styles to better performing ones.

And test and respond for fashion items allows the retailer to assess customer style preferences so it can buy into known demand. In denim, for example, "there is lot of variation in terms of rise, in terms of leg silhouette, and novelty - and we can be more responsive [to the silhouettes that are selling]."

"It’s very clear that it’s having a positive impact and it’s the right thing to do," Peck says. "And then the question really is scaling it and continuing to scale it as fast as we can.

"We are in the business that we guess a lot and anything that we can do to minimise the guesses and guess better, and inform it with data, has a real positive impact on the business."

"Spinning plates"
Peck talks about "a lot of plate spinning right now" for himself and new Gap president Jeff Kirwan, adding: "He and I both feel very strongly that we can't wait. So, we're working these things simultaneously."

In the mix are the length of the pipeline - "Old Navy has been running on a shorter pipeline for a while; and Gap is developing on that pipeline now" - the trend process, the assortment architecture, the supply chain capabilities, along with "a number of other things as well which we're layering in."

All of which means: "Spring will come to market with a shorter pipeline. But it's going to be a hybrid really of the way they have traditionally brought it to market and the new process that we're building." The new platform will really kick in "as we go through product development for 2016 in the outlying seasons."

Whether this is enough remains to be seen.

"Historically, [Gap] has been able to regain traffic/AUR quickly following product improvement," says analyst Susan Anderson at FBR Capital Markets, adding: "But, given the several seasons of lacklustre assortments, it may take more time to regain the customer."

While Michael Binetti, analyst at UBS Investment Bank, expresses concern "that the division could get worse before it gets better."