Add Gap to the chorus of retailers forecasting a grim holiday season. It also has another message, about the state of the retail industry more broadly.
The company warned on Thursday that a dour third quarter was going to bleed into an even more difficult fourth. It trimmed its earnings forecast for the year, and its shares dropped 6 percent in after-hours trading.
That Gap has problems is not exactly news. Its shares are down 40 percent so far this year. High-profile departures have raised questions about its strategy, including those of Stefan Larsson, the Old Navy brand president who went on to become CEO of Ralph Lauren, and Marissa Webb, the creative director of Banana Republic, who lasted just 18 months.
But the divergent performance of those two brands tells a bigger story about where retail is heading and what shoppers want.
While sales at established Banana Republic stores have declined for eight of the past nine months -- with October sales down by 15 percent from the year before -- sales at its established Old Navy stores have kept growing.
The gap (no pun intended) between the two reflects a bifurcation seen throughout retail. Shoppers are either flocking to lower-end chains or higher-end luxury brands, while mid-line retailers get squeezed. Customers are now so trained to seek out discounts and off-price retailers for wardrobe essentials like jeans or black blazers that they no longer bother with traditional, mall-based fashion store chains, if all they are selling are basics that can be found elsewhere for cheaper.
At Old Navy, Larsson figured out how to give personality to a brand that had grown boring. He kept the clothes cheap, but gave shoppers a reason to go there, with items like fashion jewelry and athletic wear that mimicked Lululemon's designer yoga pants and bra-tops, at a fraction of the price.
In contrast, Banana Republic hasn't been able to bring its plain-vanilla work wear more fashion-forward. It's lagging behind competitors like H&M and Zara, which are churning out fashionable styles more quickly and cheaply. Banana Republic started out as a way for Gap to serve a market looking for affordable luxury. Now it's neither affordable enough for the lower end of a divided market nor luxurious enough for the higher end.
On the earnings call, Gap CEO Art Peck said the company knows what its problems are and that we should expect better Gap and Banana Republic products this Spring. Consumers may not wait around to find out.
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