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Gap is a total disaster

Brian Sozzi
Editor-at-Large

Let’s not mince words: The now 50-year-old Gap (GPS) brand is an utter disaster.

After years of mismanagement, a steady flow of disappointing styles and simply better choices for clothes just about everywhere else in the mall (and Target), the once iconic Gap brand is falling apart at the seams.

“Gap is losing relevancy,” veteran retail analyst Janet Kloppenburg of JJK Research said on Yahoo Finance’s The First Trade.

How else can you sum up another dreadful quarter delivered to battered investors Thursday night? The Gap brand saw its same-store sales dive 7% in the second quarter, held back by MIA (missing in action) store traffic and high levels of discounts. Gap was also hampered by a decision out of management to shift marketing dollars to the fall shopping season.

So in short, people really REALLY forgot that the Gap brand even exists.

Gap’s same-store sales — a key retail measure that assesses whether people are actually shopping at your store — has tanked in nine of the last 10 quarters, according to Bloomberg data. That’s awful. But again, not surprising as Gap has continued to deal with stagnant styles and poor fits once more in 2018.

“While the comp sales at Gap brand this quarter were unsatisfactory, this is a brand that remains powerful and relevant,” Gap CEO Art Peck told analysts on a conference call. It’s a line from Peck that has become the norm on these earnings calls. If the Gap brand was powerful and relevant, per Peck’s consistent claims, sales wouldn’t be falling apart at the seams dating back five years.

None of it is normal for a retailer. Why the bottom line hasn’t completely fallen apart you ask? Gap has moved to shore up profitability by closing hundreds of underperforming stores this past year, while the Old Navy division subsidizes the Gap brands numerous missteps.

Gap’s second-quarter adjusted earnings came in at 63 cents versus analyst forecasts for 53 cents. Overall same-store sales fell 4%, worser than estimates for a 3.1% drop.

Same-store sales fell in all three divisions, even the relatively strong Old Navy division.

“2Q was tough, and we knew it was off to a rocky start given May weather was not great. Challenging traffic trends have persisted into 3Q as well,” wrote Jefferies analyst Randy Konik in the note.

Old Navy is Gap’s only bright spot

Old Navy shoppers leave an Old Navy store in Redwood City, Calif. (AP Photo/Paul Sakuma)

The only thing Gap investors have to look forward to is the spinoff of Old Navy in 2020. More details are expected to be shared at a September investor day in New York City. Konik believes Old Navy is the “crown jewel” of the portfolio — he is on the mark.

Unfortunately, the namesake Gap brand is anything but a jewel — which makes its survivability beyond 2020 as a stand-alone company a serious question mark. Old Navy won’t be around to put a Band-Aid over the core issues (a lack of relevancy in the marketplace). Unless Gap starts serving Beyond Meat sandwiches and White Claw hard seltzer at all of its stores the message is clear —Gap won’t be around to celebrate its 100th birthday.

Brian Sozzi is an editor-at-large and co-host of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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