Headlines are bleak for apparel retailers. On Wednesday, Aeropostale filed for bankruptcy in an attempt to turn its fortunes around, as sales crumbled while younger customers turned their back on branded clothing. It joins others, including Pacific Sunwear of California and Wet Seal in bankruptcy court.
For the much larger player in the space, Gap (ticker: GPS), all of the trends that are pushing out smaller retailers are also impacting this dominant chain. Between its brands — which include Gap, Old Navy and Banana Republic — sales have fallen 4 percent over the past year.
There are a number of reasons why, including the impact of e-commerce and the lack of new fashion trends. But Gap’s reactions to the issues lie squarely on the company. Now, under a new management team headed by CEO Art Peck for a year, investors want to see improvement.
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These issues have kept the stock near three-year lows: Is it time for a rebound for this iconic retailer?
Gap’s struggles start with the flagship store. Gap — the brand — has struggled with its promotional efforts. As mall traffic has decreased, Gap tried to encourage more customers by increasing the number of sales. This hasn’t produced better results and “the margin is too low,” says Morningstar analyst Bridget Weishaar. But Gap continues the promotional strategy because of large inventory.
Management has revamped its supply chain. Instead of rolling out more product throughout the country, it is using a “responsive” strategy that will test apparel in a fewer number of stores. If it sees certain pieces of clothing connecting with customers, then it can roll it out faster to other stores. This will allow it to time promotions more strategically and in a way that doesn’t hurt margins.
Weishaar believes these efforts will improve Gap’s average operating margins from the current 12 percent toward the mid-teens posted by fast-fashion stores, like H&M.
However, these improvements were meant to begin taking hold this spring. Early results haven’t been promising, with March comparable sales down 6 percent compared to an increase of 2 percent in 2015.
Gap could close more stores. In June, Gap announced that it would close 175 of its specialty stores, or about 25 percent of the fleet. While it’s still undergoing the cuts, by the end of the transition, it hopes to have 500 specialty Gap stores and 300 outlet locations. However, that might not mean the end of the closings.
Paul Trussell, an analyst with Deutsche Bank, believes the company needs to cut another 175 stores by the end of 2016 due to “market share losses and decreasing in-store productivity.”
Gap has taken steps to integrate online. Whether customers want to buy in-store, online or via a mobile phone, Gap is improving measures across all of its brands, including the offering of in-store pickup for online purchases.
The company has shown some positive results, as online sales grew to $2.53 billion in 2015, a 12 percent increase from 2013.
“You need to prune,” says Oliver Chen, an analyst for New York City firm Cowen. Chen expects Gap to cut stores as needed while continuing the “integration between bricks and clicks.”
But this isn’t an issue unique to GPS. A number of retailers — from Macy’s (M) to Staples (SPLS) and Abercrombie & Fitch Co. (ANF) — have already taken this tactic, as e-commerce continues to invade brick-and-mortar sales.
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Old Navy highlights the fashion problem. Gap’s largest brand by sales is Old Navy, which has also experienced a significant slowdown. Since last year, sales climbed practically zilch, despite having 17 more stores in operation.
“The entire apparel sector has been very weak,” Weishaar says. “There’s a shift in spend away from apparel to different sectors and no new fashion trends.”
But, maybe more concerning, is that it could be facing newer competition. It seems to Chen that Old Navy customers didn’t respond as well to promotional efforts either, which has long been a mainstay of the brand. Larger stores, like Target Corp. (TGT) and Wal-Mart Stores (WMT) likely cut into some of the success of those promotions.
To counter the impact, Gap is trying to grow aggressively in Asia, increasing stores in the region by 51 percent in 2015. Old Navy also replaced its global president with Sonia Syngal. She has supply chain background within Gap, which investors, like Weishaar, hope she will use to improve the product mix at Old Navy as well.
Gap’s price remains deflated. All the efforts to turn around results in the face of troubled retail dynamics have done little to improve the stock. Over the past year, it has fallen 44 percent to under $23.
“It looks very cheap right now. The market is expecting it can’t turn around the Gap brand,” Weishaar says. “I disagree with that.”
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If you believe in the staying power of the Gap, though, you will get paid to wait for that next sizzling fashion must-have with a 4 percent dividend yield.
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4 Reasons the Gap Has Remained on Sale originally appeared on usnews.com
