Photographer: Kiyoshi Ota/Bloomberg

Gap’s Bet on Velvet This Holiday Season Isn’t Enough for Critics

  • Shares tumble after investors grow pessimistic about the chain
  • Analyst downgrades stock to a sell as Gap’s struggles drag on

Gap Inc. Chief Executive Officer Art Peck has an answer for critics who say the company can’t get its clothing selection right: velvet.

The apparel chain, which owns Old Navy, Banana Republic and other brands, is making a bet that velvet will be in demand this holiday season -- part of broader efforts to overhaul its product line. And Peck is “cautiously optimistic” that his turnaround plan will begin to pay off in the fourth quarter and beyond.

Art Peck

Photographer: Michael Nagle/Bloomberg

“I asked the question the other day of all of our brands,” he said on a conference call Thursday evening. “I said, ‘Just tell me we all have velvet.’ And we all actually have velvet, which is super on-trend right now across every single one of our businesses, from Athleta, Old Navy and the Intermix. I feel like we’re in a better spot.”

Investors and analysts aren’t so sure. After Gap delivered its third-quarter results and outlook, the stock tumbled as much as 12 percent on Friday. Shareholders were originally promised a sales rebound in the spring, but results have continued to languish at the company’s Gap and Banana Republic chains. The lower-priced Old Navy division is a bright spot in an otherwise bleak picture.

Citigroup Downgrade

Paul Lejuez, an analyst at Citigroup Inc., downgraded Gap to sell in the wake of the results.

“We believe Gap brand’s struggles are likely to persist,” he said in a report. And Old Navy’s comeback may not be sustainable, said Lejuez, who previously had a neutral rating on the stock.

The shares fell as low as $27.03 in New York trading, the biggest intraday decline since May. The stock had gained 24 percent this year through Thursday’s close as investors wagered a comeback was in the works.

Adding to the company’s woes was a fire at the company’s distribution center in Fishkill, New York, which took a toll on all three of Gap’s major chains. The August blaze forced the retailer to reroute deliveries and boost staff at other facilities.

Old Navy’s same-store sales grew 3 percent last quarter, including a negative impact of 1 percentage point from the Fishkill fire. On that basis, the Gap and Banana Republic brands both tumbled 8 percent in the third quarter, which ended Oct. 31.

Getting shoppers in the door to even see the new products may be a challenge, Cowen & Co. analyst Oliver Chen said in a report: “Will customers come back to see the velvet?”

Earnings were 60 cents a share in the period, excluding some items, the company said on Thursday. It had previously indicated that profit would be 59 to 60 cents, with analysts pegging their estimates to the higher figure. Third-quarter net sales were $3.80 billion, also matching estimates.

New CFO

Earlier this week, Gap hired Teri List-Stoll as its next chief financial officer, turning to a former executive of Dick’s Sporting Goods Inc. and Kraft Foods Group Inc. List-Stoll will step into a job being vacated by Sabrina Simmons, whose departure was announced on Nov. 2.

In another sign of upheaval, Banana Republic is exiting the U.K. next year. The company will close all eight Banana Republic stores in the country, although customers can still order items through the chain’s regional website.

But Peck remains upbeat. The company is sending out a printed Banana Republic catalog to customers this season for the first time in years. And it’s running Gap ads on TV, something it didn’t do last Christmas.

“It is a significant uptick in marketing,” he said on the conference call. “We’ve got to get the flywheel turning again.”

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