Gap’s Old Navy Exits Japan as Chain Copes With Sales Decline

  • U.S. retailer shutting about 75 stores in total to shift focus
  • Japan shoppers in money-saving mode, picky on brands: analyst

Japanese shoppers will have to look elsewhere for performance fleece.

Gap Inc. is closing all its 53 Old Navy outlets from Japan this year, ceding ground in the world’s third-largest economy to local-born fashion brands such as Fast Retailing Co.’s Uniqlo and Ryohin Keikaku Co.’s Muji.

“I’m obviously disappointed that we’re going to be discontinuing operations, but I view it as a sign of a good company when you acknowledge that the business isn’t going to deliver and you make changes and move forward,” Chief Executive Officer Art Peck said in an earnings call, referring to the Old Navy closures.

Gap is shutting the Japanese stores and refocusing on North America and China, according to a statement on Thursday. The closures are a sign the Japanese market is proving to be one of the toughest and most competitive for foreign brands, as consumers brace for tougher economic times. Japan has so far failed to break free of a cycle of expansion and contraction, despite more than three years of stimulus under Abenomics.

“Japanese consumers, who are generally shopping experts, are increasingly in money-saving mode,” said Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute. “Living in a long-term deflationary environment, they have a strong sense that they don’t want to fail at shopping. For foreign brands, Japan is one of the hardest markets to be successful.”

Picky Shoppers

To save money, Japanese shoppers tend to turn to local brands such as Uniqlo that they feel are more cost-effective, instead of Gap or Old Navy, especially “if there are no outstanding differences in terms of design or functions,” Tokyo-based Nagahama said in a telephone interview.

The San Francisco-based retailer still has 170 Gap stores and 51 Banana Republic outlets in Japan. In another sign of its diffiiculties, Gap didn’t reaffirm its earnings forecast for the year, saying the retail climate would have to improve in order to meet the target.

Gap’s Peck is taking more drastic measures after a planned turnaround this spring failed to materialize. The 60-year-old CEO, who took the reins last year, has had to combat sluggish store traffic and problems with the company’s product assortment. On top of that, the Old Navy business -- once a bright spot -- is now suffering from declining sales.

In all, Gap is shutting down about 75 locations in a bid to revamp its struggling operations. The hope is to save $275 million a year from the move and improve operating margins by 2 percentage points.

Gap shares have plunged about 55 percent to $17.28 in the past year through the close of trading Thursday. The S&P 500 Index fell 4.3 percent in the period.

Gap reported earnings of 32 cents a share last quarter, in line with analysts’ estimates. Sales fell about 6 percent to $3.44 billion in the period, which ended April 30. The company telegraphed the numbers earlier this month, saying that profit would be in the range of 31 to 32 cents.

Uniqlo Fan

Gap’s long-term issuer default rating was cut to junk status by Fitch Ratings earlier this month after the company reported its first-quarter same-store sales results. The move followed a 7 percent decline in Gap’s same-store sales in April, showing the retailer is struggling to reverse its sales slump. Analysts had predicted a gain of 1.1 percent, according to Retail Metrics.

Standing outside a Uniqlo store near Tokyo’s main train station, Ayumi Kato won’t be missing Old Navy’s exit, as the office worker said she’s never heard of the brand.

“Sometimes I buy Gap jeans and shirts if it’s at a good price, but never with the intention to wear it more than a year,” said the 37-year-old. “Most of the time, I buy basic wear from Uniqlo. There are lots of shops available and also because their clothes can sometimes be worn for the office.”

Before it's here, it's on the Bloomberg Terminal.