Gap expects third-quarter gross margin to be similar to the second quarter

Gap expects third-quarter gross margin to be similar to the second quarter

US clothing giant Gap Inc has guided down third-quarter gross margin and revealed the departure of Banana Republic creative director Marissa Webb, after reporting yet another decline in monthly comparable store sales. 

The San Francisco-based company, which operates more than 3,300 stores, saw comparable store sales edge down 1% during the five weeks to 3 October, compared to flat sales in the same period of last year. Banana Republic reported a 10% decline, while Gap's namesake brand remained flat – the segment's strongest performance since April 2014 – and Old Navy increased 4%. 

"While September proved challenging, our leadership teams remain focused on taking the necessary steps to improve performance,” said CFO Sabrina Simmons.

The retailer now expects third-quarter gross margin to be flat with the second quarter as it plans to clear inventory before selling holiday merchandise. 

According to FBR & Co analyst Susan Anderson, it is likely Gap will lower its earnings per share guidance when it releases its third-quarter results. “We believe that earnings visibility for the year has declined, with increased uncertainty regarding Old Navy's holiday/fourth-quarter performance as it laps difficult year-ago compares,” she noted.

While UBS analyst Michael Binetti said Old Navy's September performance represents a 3% and 6% deceleration compared to the second quarter on a two and three-year basis, adding that units were below expectations, driving the need to clear through product in October ahead of the holidays. 

“We are concerned Old Navy may need to start promoting to prop up comparable store sales,” he warned, adding: “Given that Old Navy's productivity is already near/at historical peak levels, we believe it could difficult to maintain these margin levels if comparable store sales momentum slows.” 

Separately, the company revealed that Marissa Webb is stepping down, but will remain in an advisory role to the brand. Under the leadership of Webb, who took on the role in April last year, women's assortment has not gained traction – evident in the weak comparable store sales this year.

Last week, it was revealed that Old Navy president Stefan Larsson would take the helm at Ralph Lauren, prompting analysts to ask whether Gap can maintain its momentum as it tries to turnaround its Banana Republic and Gap brands. 

Click on the following link for further insight on Larsson's departure: Can Gap maintain its momentum minus Larsson?