Gap has an ever-widening assortment… of problems. The company still has an interim CEO, had a skid last year with inclusive clothing, has broken traumatically and ruinously with Kanye West, has launched to cut staff and, above all, fails to connect with consumers. Even her most recent bet, Athleta, is being a fiasco: “Sales for the quarter were affected by continued product acceptance issues,” the company says of her. Despite everything, the group has published results that show an improvement in margins and have restored hope to investors. The shares have skyrocketed on the stock market outside of normal hours by more than 15%.
Interim Chairman and CEO Bob Martin is trying to turn the company around after years of crisis and decline. The group of fashion chains announced a deep restructuring a month ago 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 fiscal year were 3,276 million dollars (about 3,050 million euros), a fall of 5.8% compared to 3,477 million the previous year. The gross margin, however, improved from 31.5% to 37.1%, so that in absolute terms it improved by 11%, up to 1,214 million. This is the data that investors have valued the most and that has also made it possible to reduce operating losses from 197 to 10 million dollars and net losses from 162 to 18 million, according to the accounts it has reported to the United States Securities and Exchange Commission (the SEC).
Online sales have fallen by 9%, even more than those in stores, and their share of the total has dropped to 37%. The group added 101 net stores in the quarter, up to 3,453 establishments, 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 decreased by 4%.
assorted setbacks
The analysis of sales by chains is a catalog 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 has explained to analysts, errors with colors, garments and patterns
Gap, the chain that gives its name to the group, is the one that has done the worst this quarter, with a 13% drop in sales, up 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 closing of Yeezy Gap and the negative effects of exchange rates. Without these factors, the drop in sales would have been 1% despite the strength of the women’s category. Because? For more problems: “the continued weakness of the sports and children’s categories, as well as the strategic closures of stores 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 excessive 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 women’s inclusive clothing campaign left the chain without merchandise in the most common sizes, weighing down sales. The excess of large sizes not only alienated the usual clientele, but also forced aggressive sales to be applied, eroding sales and margins, disrupting supply and inventory management. That resulted in several severed heads and a drop in sales of 19%. About that horror, in the first quarter of this year Old Navy sales have fallen again, 1%. The recovery in women’s clothing sales has been offset by “continued weakness in the sportswear and children’s clothing categories, as well as the continued slowdown in demand from lower-income consumers.”
Despite the fact that sales fall in all chains, the group has saved on air transport costs, it 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 it is far from Inditex’s 57%, the best in the class. In addition, he has cut overhead and personnel expenses. All this is what has boosted 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 steps necessary to drive decisive change at Gap that will ultimately put us back on the path of long-term, consistent 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 embracing a new operating model and organizational structure, a renewed focus on our customer, and for their continued belief in our incredible brands.”
in search of 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 running the company at this point. The company is still looking for its first executive. “We look forward to introducing the next leader of this great company, who will bring passion, vision and an unwavering client focus,” said Mayo Shattuck, Lead Independent Director.
The interim boss, meanwhile, says the company is undertaking not a one-time cost cut, but a complete culture change to resemble the best in the industry (which it was among many years ago). He has pointed out that the 1,800 layoffs have been a painful decision, but that it will contribute to a cut of 550 million a year in the group’s costs. “Beyond these organizational changes, the greatest reward will come when we emerge as a more informed, faster and more creative company, delivering 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 on obtaining long-term results”, he said.
And he continued: “To make it clear, this is not a cost reduction exercise. This is a cultural and mindset shift that will be part of our evolution as we move forward. The teams are already at their posts and are systematically pursuing efficiency. We will continue to look for new opportunities to rationalize our investments in technology and marketing and to explore ways to further optimize our long-term cost structure.”
The shakeup 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 shore up the foundation of this company for the long term by reducing our cost structure, creating a culture of creativity and empowerment, and refocusing our business on the customer side. These types of foundational changes pave the way for a future CEO to take over a company that is healthier, more productive and prepared to compete”, he concluded.
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