What Happened to Gap Stores?

Do you remember when Gap Stores (GPS) were hip and innovative? Gap made khakis and basic tees cool. Banana Republic made preppy cool. Old Navy made you want to wear board shorts and flip flops with annoying commercials you couldn’t get out of your head.

Somewhere along the line they lost their way; while almost all retailers are struggling in an extremely tough environment, the Gap seems to have missed out on the bubble-induced spending orgy altogether. With Q1 results in, they have now reported 19 consecutive quarters of negative same-store sales growth:

Management would like to have you believe that this performance isn’t too shabby considering the state of the consumer and compared to the results of their competitors:

The market conditions, from our perspective, continue to be challenging. With that said, I think our performance in Q1 was respectable. None of us like to produce results in the quarter below last year. I don’t think any business would ever want to produce results below last year but with the conditions in which we are operating in, I think it was respectable and versus a lot of our competitors, I was pleased with our performance in the first quarter.

If we look at their recent sales performance against a couple of the competitors we talked about last week, minus Aeropostale (ARO) since they are a clear out-performer, this statement seems to hold up:

However, if we look back a little further, you can see that the idea that their performance is a result of economic conditions becomes a little hard to believe. I wonder what their excuse was back in 2005 and 2006:

This is not a recent phenomenon – growth has been stagnant for quite awhile now:

With improving consumer sentiment, there is hope that overall retail sales are in a bottoming process. In April, Old Navy reported its first positive same-store sales results in over two years. However, if we look at same-store sales by brand we can see it will be at least a few months before this is any reason to cheer:

The one consistent bright spot for the company has been their direct-to-consumer business, which surpassed $1 billion in total sales for 2008. Gap was an early entrant into the online channel, and have more than doubled their direct sales since 2003:

While Gap certainly has had some struggles over the past few years, they also have a pristine balance sheet with almost no debt and about $1.8 billion of cash. However, in an extremely tough retail environment with intense competition, there will need to be drastic change to return to the days when we’re all humming Old Navy tunes in our heads…

Disclosure: no positions

Comments

[captainccs:]

Old age and bloat are unrelenting. GAP is yesterday's story and has been for quite some time. Styles change and old stores don't know how to keep up. Once markets are saturated management has to come up with gimmicks to promote growth which, more often than not, do not work. GAP had its day in the sun. Time to make room for upstarts like Urban Outfitters, Buckle, American Apparel and True Religion. Time does not stand still.

Long APP, TRLG & URBN

Jun 01 08:10 AM

[profretail:]

Part of GAP's problem is their design team which is weak and lacks a direction or consistent look. They would have done better to stick to updated classics and value rather than hoping on every new trend and trying to go after every new upstart. They should have sacrificed sales for profit.
Also, you have to take into account the numbers of the children's 4-16 business which is a declining market. The bubble of babies from 1988-96 impacted their kids business positively when they were the only game in town. Now their are less kids and their is more competition at the same time that they walked away from the 38-50 year old hip customer. They are lucky they are doing as well as they are.

Jun 01 02:36 PM