Gap Drops After Reporting Weaker Than Expected March Sales, Excess Inventory

Shares of apparel retailer Gap (GPS) are sliding in morning trading after the company reported March comparable sales that were weaker than the company expected and warned that excess inventory will pressure its gross margin.

WHAT’S NEW: Gap announced yesterday after the market close that March comparable sales for all of its brands declined 6%, versus an increase of 2% last year. Same-store sales for its Gap Global brand fell 3% vs. a 7% decline last year, while Banana Republic Global SSS plunged 14% vs. a 3% decline in the year-ago period. Same-store sales at Gap’s Old Navy Global brand were down 7% vs. a 14% increase last year. Overall net sales for the five-week period ended April 2 were $1.43B, compared with net sales of $1.53B in the year-ago period. Gap CFO Sabrina Simmons commented that March “proved challenging,” but added that Gap is “focused on taking the necessary steps to improve results across the portfolio throughout the year.”

WHAT’S NOTABLE: Gap is entering April with more inventory than planned, which will “pressure its gross margin rate” for the first quarter, Gap said.

SOFT TRAFFIC: In a pre-recorded conference call discussing the March sales results, Gap said that performance in the first few weeks of the month were stronger, but the company “did not see the Easter build we expected as a result of weaker traffic.” For the month, Gap said traffic fell “in excess” of its comp. Gap did note that it saw signs of improved customer response to the Gap brand’s spring assortment. Gap has been trying to refresh its namesake brand, with CEO Art Peck commenting on the company’s last earnings conference call that the retailer is “buying what’s working, rather than guessing what’s going to work.” 

BRANDS LOSING RELEVANCE: In a March 16 note to investors, Morgan Stanley’s Kimberly Greenberger said that the Gap and Banana Republic brands have lost relevance with shoppers. Greenberger, who believes Gap will not be able to overcome “structural headwinds” in the next one to two years, said the brands cannot be fixed in the near-term, so it is likely that gap will continue to lose market share.