Gap soars on the stock market despite its catalog of problems

A Banana Republic store in Glendale, California.ETIENNE LAURENT (EFE)

Gap has an increasingly varied assortment... of problems. The company continues with an interim CEO, had a slip last year with inclusive clothing, has broken in a traumatic and ruinous way with Kanye West, has launched to cut staff and, above all, fails to tune in with consumers. Even its most recent bet, Athleta, is proving to be a fiasco: "Sales for the quarter were affected by continued product acceptance issues," the company says of it. Despite everything, the group has published results that show an improvement in margins and have restored hope to investors. Shares have soared on the stock market after hours more than 15%.

Interim Chairman and CEO Bob Martin is trying to straighten the company out after years of crisis and decline. The group of fashion chains announced a month ago a deep restructuring with 1,800 layoffs and is trying to reorganize to stop the fall in sales and the bleeding of losses, although it remains without a very clear direction.

Gap's sales in the first quarter of its year were 3,276 million dollars (about 3,050 million euros), a fall of 5.8% compared to 3,477 million the previous year. Gross margin, however, improved from 31.5% to 37.1%, so that in absolute terms it improved by 11%, to 1,214 million. That is the data that investors have valued the most and that has also allowed to reduce operating losses from 197 to 10 million dollars and net losses from 162 to 18 million, according to the accounts that it has communicated to the Securities and Exchange Commission of the United States (the SEC).

Online sales have fallen by 9%, even more than those of stores and their share of the total has fallen to 37%. The group added 101 net stores in the quarter, up to 3,453 stores, of which 1,252 correspond to Old Navy, the group's main chain, in North America. Of the stores, 2,601 are operated by the group and the rest are franchises. Compared to a year ago, the number of establishments has been reduced by 4%.

Varied setbacks

The analysis of sales by chains is a catalogue of setbacks. The youngest and newest bet, Athleta, with which the group wanted to better connect with new segments of younger consumers, has encountered the aforementioned "acceptance problems". Behind that euphemism there is a drop in sales of 11%, up to 321 million dollars and, as Bob Martin explained to analysts, errors with colors, garments and patterns.

Gap, the chain that gives its name to the group, is the worst this quarter, with a drop in sales of 13%, to 692 million dollars. In this case, the alleged problems are, above all, the sale of Gap China to Baozum, closed on January 31, the closure of Yeezy Gap and the negative effects of exchange rates. Without these factors, the decline in sales would have been 1% despite the strength of the women's category. Why? For more problems: "the continued weakness of the sports and children's categories, as well as strategic store closures in North America."

In the case of Banana Republic, the drop in sales has been 10%, up to 432 million dollars. The company's explanation is that sales "have been affected because the brand experienced outsized growth last year, driven by changing consumer preferences."

In the case of Old Navy it is the other way around. What was a disastrous quarter was the first of last year. A failed campaign for inclusive women's clothing left the chain without merchandise in the most common sizes, weighing on sales. The excess of large sizes not only alienated the usual clientele, but forced to apply aggressive discounts, eroding sales and margins, misaligning the management of supplies and inventories. That resulted in several severed heads and a drop in sales of 19%. On that horror, in the first quarter of this year Old Navy sales have fallen again, by 1%. The recovery in women's clothing sales has been offset by "continued weakness in the sportswear and children's categories, as well as continued slowdown in demand from lower-income consumers."

Although sales fall in all chains, the group has saved on air transport costs, has had to apply lower discounts, which has resulted in a higher gross margin, although that 37.1% is still lower than it had two years ago and is far from the 57% of Inditex, the best in the class. In addition, it has cut overhead and personnel costs. All that is what has driven the price, because the results have exceeded expectations. But cost reduction will never be enough if sales do not react.

"We continue to take the necessary steps to drive decisive change at Gap that will ultimately put us back on track for consistent long-term results," Bob Martin said in a statement. "The need for lasting change is permeating the organization and I want to express my gratitude to our employees for adopting a new operating model and organizational structure, a renewed focus on our customer, and for their continued belief in our incredible brands."

Looking for a boss

Martin provisionally assumed the role of Group CEO in July 2022 from Sonia Syngal. He has acknowledged in a call with analysts that he did not expect to continue at this point running the company. The company is still looking for a chief executive. "We look forward to introducing the next leader of this great company, who will bring passion, vision and an unwavering focus on the customer," said Mayo Shattuck, Coordinating Independent Director.

The interim boss, meanwhile, assures that the company is undertaking not a one-time cost cut, but a complete change of culture to resemble the best in the sector (among which many years ago he was). He said the 1,800 layoffs were a painful decision but would contribute to a $550 million annual cut in the group's costs. "Beyond these organizational changes, the greatest reward will come when we appear as a more informed, faster and more creative company that delivers brand and cultural relevance to our customers. We have not limited ourselves to improving the cost structure, but we have organized ourselves with an eye on the best standards in the sector and obtaining long-term results," he said.

He continued: "To be clear, this is not a cost-cutting exercise. It is a cultural and mindset shift that will be part of our evolution as we move forward. The teams are already in place and systematically pursue efficiency. We will continue to look for new opportunities to rationalize our technology and marketing investments and explore ways to further optimize our long-term cost structure."

The shake-up goes further and the company is looking for new business procedures, pricing systems, improvements in design and creativity and new analytical tools. "I hope this has further clarified our commitment to underpinning the long-term foundation of this company by reducing our cost structure, creating a culture of creativity and empowerment, and reorienting our business towards the customer. These types of foundational changes pave the way for a future CEO to take charge of a company that is healthier, more productive and prepared to compete," he concluded.

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