• Q3 net income fell 17.7% to US$204m from $248m
  • Net sales decreased 2% to $3.80bn compared with $3.86bn
  • To shutter 65 company-operated stores this year, compared with 50 stores announced earlier
Net sales fell 2% to $3.80bn compared with $3.86bn for the third quarter last year

Net sales fell 2% to $3.80bn compared with $3.86bn for the third quarter last year

US speciality clothing retailer Gap Inc says it is making progress to improve product across its brands, although both sales and revenue continued to fall in its third quarter.

Net income in the quarter fell 17.7% to US$204m from $248m in the year ago period, while merchandise margin rate was up 220 basis points compared with last year, primarily driven by gains at Old Navy.

Meanwhile, net sales decreased 2% to $3.80bn compared with $3.86bn for the third quarter last year. The company noted that the translation of foreign currencies into US dollars positively impacted reported net sales for the third quarter of fiscal 2016 by about $17m.

Total company comparable sales were down 3%, including an estimated negative impact from the Fishkill distribution centre fire in August of approximately 2 percentage points, versus a 2% decrease last year.

For both the Gap and the Banana Republic brands, comparable sales slid 8%, while Old Navy sales rose 3% compared to the year ago period. 

"I'm pleased to see improved product across our brands, as well as areas of healthier merchandise margins, even against the backdrop of challenging traffic trends during the quarter," said CEO Art Peck.

"As we move into the holiday season, our teams are sharply focused on execution and delivering great experiences across the portfolio. Looking forward, we remain dedicated to utilising our scale advantage in supply chain, as well as through knowledge sharing, in order to drive product innovation across brands and categories."

Sales in the US were down by 2.4% to $2.97bn, while Europe sales fell 17.6% to $164m. Asia sales were flat at $376m.

The company reaffirmed its full-year earnings per share to be in the range of $1.87 to $1.92, excluding the negative impact of restructuring costs, which is now expected to be approximately $0.42 to $0.46.

Gap has been trying to reposition for long-term growth with a focus on "geographies with the greatest potential," in addition to streamlining its operating model. As part of this effort, the company now expects net closures of about 65 company-operated stores in fiscal year 2016 and a 3% reduction in square footage compared to last year.

Last month Gap revealed it is to shutter all eight of its Banana Republic stores in the UK, with the majority of the locations due to close by the end of fiscal 2016.

Gap to shutter all UK Banana Republic stores

"We remain cautious in our holiday outlook for the Gap and Banana Republic divisions, given the weak sales trends as consumers have not responded positively to the product," notes Stifel analyst Richard Jaffe. He adds the under-performance this year, despite a change in merchandising leadership at both Gap and Banana Republic, and the ongoing sales shortfall, suggests that all is not yet right at Gap and Banana Republic brands.

Neil Saunders, CEO at retail analyst Conlumino, is more forthright. "This is a company in a tail-spin with no real clue how to pull out of it," he says.

"This is the latest in a long line of terrible results which, tellingly, have resulted in the Gap division's US revenue declining by 21% over the past three years.

"If profit were holding up then the company could, perhaps, be excused for taking its time. However, for the latest period net income dropped by almost 18%, and in the year-to-date it is down by 35%. Over a two-year period, third-quarter net income is down by 40%.

"These are serious declines which puts Gap on a trajectory where it will eventually run out of financial head-room to engineer changes and reinvent its business.

"If the problems at Gap were conceptually difficult then we would afford some sympathy to management. However, they are far from hard to grasp: products are dull, prices are wrong, and there is little innovation.

"The one bright spot in Gap Inc's portfolio came from Old Navy [which] remains, by some margin, the company's star brand. It now needs to use the thinking it employs here in its other two main brands."