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Gap fizzles with flat sales, gives investors pause
July 8, 2010 / 9:00 PM / in 7 years

Gap fizzles with flat sales, gives investors pause

* June same-store sales flat, below consensus of +3.4

* Analysts pause to assess back-to-school strategy

* Shares tumble 10 pct, may attract long-term buys

* Gap closes down 7.6 pct on New York Stock Exchange

By Alexandria Sage

SAN FRANCISCO, July 8 (Reuters) - Gap Inc’s (GPS.N) disappointing June sales led investors to do a double-take in assessing the clothing retailer’s prospects.

The company known for selling both high and low-priced casual styles has tried to extricate itself from a years-long slide in sales, while improving styles and boosting profit margins.

On Thursday, it surprised investors by reporting flat comparable store sales in June, sending its shares down as much as 10 percent and adding to pressure to get the next big selling season right when fall and back-to-school shopping starts up later this summer. They closed $1.50 lower at $18.22.

“The whole reason to like Gap -- we thought they had good momentum on the top line,” said KeyBanc Capital Markets analyst Ed Yruma, who rates the shares a “buy.”

“I don’t want to say we’ve lost our enthusiasm, but we have to watch this closely. Obviously, the sales performance in the month was weak.”

Wall Street had expected Gap sales to rise 3.4 percent -- not an ambitious goal when compared with the company’s 10 percent sales slide in June 2009 -- but it proved to be among the weakest retail performances for the month. [ID:nN07207305]

Gap said same-store sales fell 3 percent at Gap stores, rose 6 percent at Banana Republic and were flat at Old Navy, calling June “a difficult month with lighter traffic than we anticipated.”

The focus now moves to Gap’s fall season, where success is tied to traffic-driving campaigns, cleared-out summer merchandise and tight inventory levels.

Since taking helm nearly three years ago, Chief Executive Glenn Murphy has focused on narrowing profit margins and streamlining operations, but he has recently been more vocal about improving top-line performance and gaining market share.

Under the Gap brand’s head designer, Patrick Robinson, the company is trying to overhaul iconic looks that put it at the forefront of casual American style for decades.

If its newest fashions do not resonate with shoppers, unsold fall merchandise could compound a profit margin squeeze caused by clearing out June’s excess inventory.

“Until I see the fall campaign for Gap, which apparently is going to be based on a black pant program ... I wouldn’t be aggressively buying positions in Gap,” said Needham & Co analyst Christine Chen.

She recommended Urban Outfitters Inc (URBN.O), explaining that the operator of the Urban Outfitters and Anthropologie chains is “at very early stages” and still expanding.


    Gap shares are down 13 percent this year compared with a 5 percent drop for the Standard and Poor’s retail index .RLX.

    By contrast, the shares of Limited Brands Inc LTD.N, which has a comparable number of stores and was one of the best retail performers on Thursday, are up nearly 26 percent. The shares of another June same-store sales winner, Aeropostale Inc ARO.N, which caters to teens, are up 25 percent.

    “For a long-term investor we think today is a good entry point, but we think there are not a lot of catalysts in the medium term,” Yruma said.

    Of 31 analysts polled by Thomson One Analytics, 15 rated shares “hold,” while 14 had a “buy” or “strong buy” rating on Gap shares. Two analysts held an “underperform” rating.

    Patty Edwards, founder of wealth management firm Storehouse Partners, said Thursday’s price dip for Gap shares still did not give her enough confidence to invest.

    “I just don’t see a catalyst for them doing better unless their back-to-school fall holiday outlook is absolutely spectacular,” Edwards said. “There are better management teams and better products out there.”

    She cited teen retailer Aeropostale and department store Nordstrom Inc (JWN.N) as two of the retailers who fit those criteria.

    Although Gap has had its best success in turning around its lower-cost, family-centered Old Navy chain, its namesake Gap chain has struggled for the right fit as it revamps its trademark jeans and khakis.

    Occasionally Gap has “flashes where they get it right,” Edwards conceded of the clothes, but said improvements have been erratic.

    “They just have no point of view,” she said. “They are stuck in this environment of mediocrity right now.” (Additional reporting by Brad Dorfman and Emily Stephenson in Chicago; editing by Michele Gershberg and Andre Grenon)

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