Turning around a retail brand isn’t easy. Gap should know: It is one of the few to have pulled it off.
The retailer’s stock more than doubled between the end of 2011 and the beginning of 2014 after it emerged from a same-store sales rut that lasted for the better part of a decade. But shares have been flat as Gap’s namesake brand has posted five consecutive quarters of same-store sales declines.
Now, Chief Executive Art Peck, who helmed the Gap brand at the beginning of its resurgence and who started in his current post Feb. 1, is trying to repeat his success there—and to a lesser extent at Banana Republic. There is no guarantee he and his recently appointed deputies can execute, but there are encouraging signs Gap will look better come next spring.
Meanwhile, at 13.5 times forward earnings, Gap stock trades in line with its average over the past decade. But that is still a substantial discount to peers such as Urban Outfitters,H&M Hennes & Mauritz and Zara owner Inditex. The latter two are among so-called fast-fashion retailers whose quick-changing, trendy styles have eaten into Gap’s business.
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But becoming more like them is part of its turnaround strategy. And it is why there is a chance for Gap’s valuation to start looking a bit more like them.
Investors got a taste of what that would take when Gap said this Monday that it would shutter nearly a quarter of its North American stores and lay off 250 people in its corporate office.
That is a meaningful first step. The last time the company announced such closures was in 2011, and the past four years have likely freed more underperforming locations from their leases. The company has also likely seen cannibalization from Internet sales and increased competition from fast-fashion retailers.
Gap said the closures would mean an annualized sales loss of about $300 million and that it would take a one-time hit of $140 million to $160 million for closure costs, layoffs and inventory write-downs. But the changes will lead to annualized savings of about $25 million, beginning in 2016.
For the Gap brand, the more difficult task will be improving its fashions and convincing customers to come back to stores. To do that, it is taking a page from its stronger sister, Old Navy.
The latter, which has seen same-store sales climb for the past five quarters, has developed a system for identifying trends and testing them in stores. If the trend resonates, the company can respond quickly. Aiding this nimbleness has been a transition to a more diverse base of suppliers and the ability to buy large amounts of fabric upfront, deciding later what and how much to make with it.
Implementing the trend-tracking strategy more successfully at Gap should result in fewer fashion misses and decreased mark-downs. That should drive higher merchandise margins in the long term, said Richard Jaffe, a retail analyst at Stifel Nicolaus.
Indeed, Old Navy’s performance is perhaps the best evidence that Gap can turn a corner. At a presentation to analysts Tuesday, Mr. Peck said he didn’t expect the benefits of the changes to appear until next spring—the first collection exclusively conceived by new management. Still, any early evidence the changes are bearing fruit could boost the stock.
Granted, Old Navy’s lower price point may also factor into its success in what many analysts still consider a weak consumer environment. But Gap’s prices are similar to many of its better-performing peers.
For investors, Gap may soon be ready to wear.
Date: June 19, 2015