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Gap Investors Await Plan to Bolster Namesake Brand

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Gap Has Investors Waiting for Sales Turnaround
Sales at Gap's namesake brand have fallen for six straight months as the retailer failed to differentiate itself from such rivals as Hennes & Mauritz AB, Forever 21 Inc. and J. Crew Group Inc. Photographer: JB Reed/Bloomberg

Oct. 13 (Bloomberg) -- Gap Inc. Chief Executive Officer Glenn Murphy has spent three years cutting costs and boosting profits. During that time the stock has barely budged.

Sales at Gap’s namesake brand fell in each of the past six months as the retailer failed to differentiate itself from such rivals as Hennes & Mauritz AB, Forever 21 Inc. and J. Crew Group Inc., said Zoe Tan, an analyst for Morningstar Inc. in Chicago, who rates Gap as fairly valued.

“Something I get in a Gap, I can get elsewhere,” she said. The San Francisco-based retailer operates more than 3,000 stores.

Murphy will get a chance to defend his strategy when he speaks at an investor day in New York tomorrow. His appearance follows a 10-day stretch during which the company reported a drop in monthly same-store sales -- even as retailers as a group grew -- and unveiled a new Gap logo only to scrap it for the old one after shoppers complained.

“Some people on Facebook didn’t like it and now a big, giant apparel company is going back to something that is all about the ‘Beverly Hills, 90210’ era, instead of something new,” said Brian Sozzi, an analyst for Wall Street Strategies Inc. in New York, who recommends selling Gap shares. “I want to hear some confidence from Glenn on the Gap design team.”

Gap, which also operates the Banana Republic and Old Navy chains, rose 28 cents to $18.99 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have fallen 9.4 percent this year, compared with a 23 percent rise for the Standard & Poor’s Retail Select Industry Index. Gap traded at $17.61 on July 30, 2007, when Murphy started at the company.

Gap Brand Evolving

“Glenn and the company’s management team have been focused on gaining market share in North America,” said Bill Chandler, a spokesman for Gap. The Gap brand is evolving to a more modern look to go after younger shoppers and will unveil images from its holiday advertising tomorrow to reflect that, he said.

Murphy has boosted operating margins by closing stores and shrinking others. He revamped management, cutting 50 vice president positions, and moved sourcing to countries such as Vietnam, where labor is cheaper. The retailer is now remodeling stores to make them easier to shop and ramping up marketing for specific products, like black pants at Gap.

‘Slippery Slope’

Gap has been the company laggard, and in March, Murphy described it as “the longest slippery slope of all our brands.”

Revenue at stores open at least a year increased 4 percent in the first quarter as the Old Navy chain attracted shoppers seeking cheaper options and the Gap brand’s 1969 jeans gained more traction. Net income rose 40 percent to $302 million, a third straight gain.

So-called same-store sales, a key indicator for retailers because they exclude results from new and closed locations, gained for a second straight quarter after declining every quarter since 2004.

Revenue from sales of Gap stores in North America, largest of the company’s three chains, also advanced 2 percent in the three-month period. Investors liked what they saw, and the stock surged to a 9-year high of $26.34 on April 26.

Investors’ enthusiasm dissipated when the retailer’s overall same-store sales dropped in April after six straight months of gains. The Gap brand then posted five more months of sales declines through September.

‘Disappointing’ Results

“Earlier this year when things started to look better, many became excited about it,” said Tan. “But recent results have been disappointing. It has taken longer than expected.”

Murphy echoed that sentiment in a call with analysts after the second quarter in August when he said he was disappointed in sales and had spent weeks meeting with brand presidents discussing how to make the stores stand out from their rivals. Murphy also said the Gap brand didn’t have the tops to pair with its 1969 jeans, which sold well when they were released last year, and black pants, unveiled this summer.

“Pants fit in Gap’s wheelhouse because pants are focused on fit,” said Ed Yruma, an analyst for KeyBanc Capital Markets in New York, who recommends buying Gap shares. “Fit requires R&D time and that’s what Gap does well. What they don’t do as well is the fashion, and that’s their tops business.”

September’s performance raised doubts about when Gap stores would show steady gains and adds pressure to boost sales during the holiday shopping season, Yruma said. He upgraded Gap to a “buy” last year after the release of the 1969 jeans with the expectation that more traffic-drawing clothes would come.

“This is a very powerful earnings story when they get the top-line working,” Yruma said. “We thought they were close. It’s clear we were a little early, or wrong.”

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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