Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

Art Peck is running out of time.

The CEO of Gap has spent most of his 14-month tenure asking Wall Street for patience while he promised to overhaul the operator of struggling Gap, Banana Republic and Old Navy stores. But since he took over last February, Gap's stock has plunged 42 percent. And even though springtime was supposed to be what Peck called Gap's "no excuses moment" -- when new, on-trend fashion would appear in store windows -- it's looking as if Gap has traveled back in time.

The company's stock is trading at 2001 levels, which for Gap was the start of a lost decade of sorts as it fell out of favor with both consumers and investors. For most of the aughts, Gap's shares went nowhere. And it wasn't until a couple of years into former CEO Glenn Murphy's time helming the specialty retail chain, known for its American-style denim, that it was able to get customers to "fall back into the Gap" by attracting better design talent, making its Old Navy brand relevant to consumers, embracing e-commerce and delving into international markets. The question now is whether the company is reversing course.

Unraveling
Gap shares have plunged more than 42% since Art Peck took over as CEO in February 2015
Source: Bloomberg

Year-over-year sales at its established stores have dropped for four consecutive quarters -- eight for its namesake Gap stores. Sales weakness across all its brands continued into February and March.

Things are particularly terrible at its Banana Republic stores -- sales dropped 14 percent at established locations during the most recent quarter compared with results in the period a year earlier -- after the company failed at basic tasks like making blazers with armholes big enough for an average woman to fit into

But more notable is that comparable sales at Old Navy dropped 8 percent -- its first sales drop since 2012 -- confirming worries that the departure of Old Navy president Stefan Larsson to head Ralph Lauren would damage the only brand in Gap's arsenal that was doing a good job of attracting shoppers looking for casual jeans and sundresses at discount prices. Old Navy is Gap's largest brand, accounting for about 42 percent of revenue.

Mind the Gap
Year-over-year sales at established Gap stores have dropped for four consecutive quarters
Source: Bloomberg Intelligence

Those concerns were magnified further on Wednesday when the company announced it had appointed a longtime Gap insider, its former supply chain head Sonia Syngal, to succeed Larsson as Old Navy president. Nothing against Syngal, a Stanford engineer who helped expand Gap abroad and build a successful outlet business, but appointing an operations expert with little direct product know-how when the company is having serious issues designing its merchandise seems like a bit of a disconnect. As does doing away with Gap and Banana Republic's creative director roles, arguably the most important job at a fashion retailer.

Now, Gap's using heavy discounts to push goods out the door, causing its gross margins to sink to their lowest levels since 2003. The practice is also raising fears that even when Gap starts trotting out more fashionable styles, shoppers will already be trained not to buy anything at full price. 

Fraying at the Seams
As Gap discounts heavily to push sales, its gross margins haven't been this low since 2003
Source: Bloomberg Intelligence

Ratings agencies have continued to lower their outlooks over the past year, with Moody's warning earlier this month that continued weak operating performance could lead to downward ratings pressure. And after using share buybacks to try and prop up its earnings per share, the company has said it'll now have to use more of that money to pay down debt.

Gap's troubles could make this a great time for an activist investor to get involved and shake things up, but heavy insider ownership -- more than 40 percent of the company is owned by various members and funds directed by Gap's founding Fisher family -- will make that highly unlikely.

Wall Street doesn't expect the stock to improve anytime soon: 30 out of the 35 analysts tracked by Bloomberg have a "hold" or "sell" rating on the stock. 

Low Expectations
Analysts have lowered their 12-month price target for Gap's stock by 36 percent in the past year
Source: Bloomberg

So unless Peck starts acting with a greater sense of urgency -- replacing key executives, figuring out what the consumer wants and changing up merchandise more quickly -- his leadership could usher in another long period of fashion misses at the Gap. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net