A Banana Republic store in Glendale, California. ETIENNE LAURENT (EFE)
Gap has an ever-growing range of problems. The company still has an interim CEO, faltered last year on inclusive clothing, broke traumatically and ruinously with Kanye West, initiated downsizing, and most importantly, isn’t connecting with consumers. Even its latest bet, Athleta, is a fiasco: “Quarterly sales were hurt by ongoing product acceptance issues,” the company says. Despite everything, the group has published results that show an improvement in margins and give investors renewed hope. Shares have soared more than 15% in the after-hours market.
Interim chairman and CEO Bob Martin is attempting 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 halt the slump in sales and losses, although there is no clear direction yet.
Gap’s revenue for the fiscal first quarter was $3,276 million, down 5.8% from $3,477 million a year earlier. However, gross margin improved to 37.1% from 31.5%, so in absolute terms it improved 11% to 1,214 million. This is the data most appreciated by investors and which has also made it possible to reduce operating losses from $197 million to $10 million and net losses from $162 million to $18 million, according to accounts submitted to the Securities and Exchange Commission . of the United States (the SEC).
Online sales have fallen even more sharply than in-store sales, at 9%, and its share of total sales has fallen to 37%. The group added 101 net stores during the quarter for a total of 3,453 stores, of which 1,252 correspond to Old Navy, the group’s main chain, in North America. 2,601 of the stores are operated by the group, the rest are franchised stores. Compared to the previous year, the number of companies has decreased by 4%.
various setbacks
The analysis of the sales of the chains is a catalog of setbacks. The latest and newest bet, Athleta, with which the group wanted to better appeal to new segments of younger consumers, has encountered the “acceptance problems” mentioned above. That euphemism hides an 11% drop in sales, or as much as $321 million, and, as Bob Martin explained to analysts, color, garment and pattern errors
Gap, the chain that gives the group its name, was the worst performer this quarter, with sales falling 13% to $692 million. The alleged problems in this case are mainly the sale of Gap China to Baozum completed on January 31, the closure of Yeezy Gap and the negative impact of exchange rates. Without these factors, despite the strength of the women’s category, the decline in sales would have been 1%. Because? Other issues: “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, sales fell 10% to $432 million. The company’s statement reads that sales “have been impacted because the brand has experienced excessive growth over the past year driven by changing consumer preferences.”
In the case of Old Navy, it’s the other way around. What was a disastrous quarter was the first of last year. A failed womenswear inclusive campaign left the chain out of stocked sizes, hurting sales. The excess of large formats not only deterred the usual clientele, but also forced aggressive sales, eroding sales and margins and disrupting supply and inventory management. The result was multiple severed heads and a 19% drop in sales. That scare aside, Old Navy sales are down another 1% in the first quarter of this year. The rebound in womenswear sales was offset by “continued weakness in the athletic apparel and childrenswear categories, as well as the continued slowdown in demand from lower-income consumers.”
Despite the fact that sales are falling in all chains, the group saved on air transport costs and had to apply lower discounts, which resulted in a higher gross margin, although this 37.1% is still lower than two years ago and it is far from Inditex’s 57%, best in class. In addition, he has reduced overhead and labor costs. All of this has pushed the price up because the results have exceeded expectations. But cutting costs will never be enough if sales don’t respond.
“We continue to take the necessary steps to drive critical changes at Gap that will ultimately put us back on the path to long-term, consistent results,” Bob Martin said in a statement. “The need for lasting change permeates the organization and I want to thank our people for embracing a new operating model and organizational structure, a renewed focus on our customers and continued belief in our incredible brands.”
looking for a boss
Martin assumed the role of Group CEO on an interim basis from Sonia Syngal in July 2022. In a phone call with analysts, he admitted he didn’t expect to continue running the company at the time. The company is still looking for its first manager. “We look forward to introducing the next leader of this great company who will bring passion, vision and an unwavering focus to clients,” said Mayo Shattuck, Lead Independent Director.
The interim CEO, meanwhile, says the company isn’t making a one-off cost cut, but a complete culture shift to be among the best in the business (which it was among the best many years ago). He has indicated that the 1,800 layoffs were a painful decision but would help cut the group’s costs by 550 million a year. “Beyond these organizational changes, the greatest reward will be as we become a better informed, faster and more creative company that offers brand and cultural relevance to our clients. “We haven’t limited ourselves to improving the cost structure, we’ve organized ourselves to the best standards in the industry and to deliver long-term results,” he said.
And he continued: “To be clear: This is not a cost-cutting measure. This is a culture and mindset shift that will be part of our future development. The teams are already in place and consistently striving for efficiency. We will continue to look for new ways to streamline our technology and marketing investments and explore ways to further optimize our long-term cost structure.”
The restructuring continues and the company is looking for new business processes, pricing systems, improvements in design and creativity, and new analysis tools. “I hope this has made even clearer our commitment to strengthening the foundation of this business over the long term by reducing our cost structure, creating a culture of creativity and empowerment, and refocusing our business on the customer side.” Change paves the way for a future CEO to take charge of a healthier, more productive company that is poised to compete,” he concluded.
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