Gap Inc has tough quarter, Banana Republic struggles but Old Navy sees light at end of tunnel
Gap faced some tough times during Q2 and just how tough became clear yesterday, as it reported net income plunging 43%. So what went wrong? The retail giant didn’t manage to meet analysts’ estimates and ongoing problems at Banana Republic were a major cause.
Looking at the numbers in detail, its net income was $125m/31 cents a share in the period to July 30, down from $219m/52 cents a year ago. Total revenue fell 1.2% to $3.85bn with its comp sales down 2% (driven by a 9% drop at Banana Republic).
It now expects expects earnings per share of $1.87 to $1.92 for the year, below the $19.5 analysts had been predicting. No surprise then that its shares fell 8 cents after-hours on Thursday, although that represented a fall of less than 1%.
The company has been working hard to boost its three core chains and especially Banana Republic. But while it has enjoyed some success on that front with Old Navy, it isn’t gaining much traction with banana Republic yet. For a brand that was once able to command a premium price, that’s a huge problem, especially as the other two core chains are still not yet powering ahead and taking up the slack: comps at Old Navy were only flat in the quarter and the Gap chain’s fell 3%.
The firm did have some good news as Old Navy is obviously strengthening after a series of comp sales falls. And CFO Sabrina Simmons said on a conference call that the company’s moves to reduce markdowns across its labels are bearing fruit with merchandise margins up in Q2.
CEO Art Peck said, citing those improved margins: “While I remain unsatisfied with the pace of improvement across the business, I am encouraged by the underlying signs of progress.”
So what else is Gap Inc doing to get back on top? It has been controlling inventories and cutting production times as part of a raft of changes designed to return it to growth.
The company is boosting its marketing after a period of lower or flat marketing spend that saw a spending cut in 2015. While Q2 this year saw no change overall in the spend year-on-year, Gap plans to spend more in Q3 following the improvement seen at Old Navy after marketing investment for that chain was boosted.
And the firm wants to continue working on its supply chain to get improved speed to market for on-trend items. On the conference call yesterday, Art Peck said it had seen some success with tops featuring embellishments such as eyelet lace and was able to re-order fast for August and September drops.
It will also continue to innovate on the tech front after the success of its stretch denim, with heat-managing and stain-resistant fabrics being key, especially for its menswear offer.