Gap Still Has Plenty of Wrinkles


This year hasn’t been kind to apparel sellers, but

Gap


GPS 1.01%

is starting to look particularly worn out.

Gap on Thursday afternoon said same-store sales across its brands were down 10% in its quarter ended July 30 compared with a year earlier, worse than the 8.5% drop Wall Street expected. The biggest decline was at its value-tier brand Old Navy, where comparable-store sales fell 15%. Even Athleta, a smaller but reliable moneymaker during normal times, saw same-store sales drop 8%. The only brand seeing an increase was Banana Republic, which sells work-centric and dressier clothes.

While Gap had signaled multiple times that its bottom line would look bad as it discounts clothes that weren’t selling well, the reality was even worse than expected. The company posted a net loss of $49 million, more than three times the net loss analysts had penciled in. That makes it the fourth consecutive quarter in the red for Gap. The company took a $58 million write-down on inventory, most of which was at Old Navy.

Worryingly, though, Gap’s merchandise levels still look bloated even after all its efforts to clear out products: It ended the quarter with 37% more inventory than it did in the same period a year earlier. At least part of that is so-called pack-and-hold inventory, or more timeless, basic clothes that Gap plans to hide in storage and reintroduce in future seasons. Given that other apparel sellers also have inventory pileups, it could end up being a long road to profitability for Gap. Another concerning number: Gap ended the quarter with just $708 million in cash and cash equivalents, the lowest balance since 2001.

Gap is implementing fixes here and there. Chief Financial Officer

Katrina O’Connell

said the company is looking at ways to cut overhead costs—including in marketing and technology—in the coming quarters. The capital-expenditure budget for the year has shrunk by $50 million compared with the guidance given last quarter. After having tweaked its guidance multiple times already, Gap on Thursday said it would simply withdraw its forecast, citing an uncertain macro environment. 

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Gap’s shares are down 45.6% year to date and, as a multiple of forward sales, are trading 67% below its 10-year average. Such low valuations can be tempting for some bargain hunters, as the stock’s rally in the after-hours session Thursday seems to show.

But there are still too many open seams at Gap. Merchandising clearly needs work across the board—last quarter, at least part of the disappointing performance at Athleta was because customers didn’t like the colors and prints it introduced. The pack-and-hold strategy, meanwhile, looks a little bit like wishful thinking given that even different cuts of basic tees can become unpopular from one year to the next. And the company still doesn’t have a permanent chief executive after former head

Sonia Syngal

left last month. On Thursday’s earnings call, interim CEO

Bob Martin

said the board is actively evaluating potential candidates but didn’t offer a timeline.

Sharp discounts at Gap should tempt customers, but perhaps not investors.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

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