Mind the Gap: Still Suffering from Lack of Brand Identity

August 21, 2009  |  about: GPS

Gap Inc. (GPS) put out two press releases yesterday, the first announcing their fiscal 2nd quarter earnings, and the second highlighting promotional events to celebrate the company’s 40th anniversary. The company is hoping that investors cheer the fact they were able to post earnings roughly in line with last year. If not, there will still be a celebration, as the Gap will be outfitting floor traders on the NY Stock Exchange with Gap jeans today, and hosting a nationwide simultaneous acoustic concert in its more than 700 stores tonight.

Gap reported a profit of $228 Million, or $0.33 diluted EPS, in the fiscal 2nd quarter. That was roughly in line with last year’s profit of $229 Million ($0.32 EPS), and slightly above analyst estimates for 32 cents per share. Net Sales in the quarter decreased by 7.3% to $3.25 Billion, while same-store sales declined 8% on top of a 10% drop a year ago. Comparable sales declined across all segments, with Gap NA -10% vs -6% last year, Banana Republic NA -15% vs -6%, Old Navy NA -4% vs -16%, and International -5% vs -6%. E-commerce continues to be the one bright spot for the company, as online sales grew 17% to $224 Million in the quarter.

While the company will be celebrating their 40th year in business, the results leave less of a reason to cheer. This comp decline extends their streak to 20 consecutive quarters of negative same-store sales. Since the start of the decade, they have now reported negative same-store sales in 30 of 38 quarters:

This is the company’s take on their results:

“We’re proud to deliver second quarter earnings per share above last year, especially during a challenging environment,” said Glenn Murphy, chairman and chief executive officer of Gap Inc. “Building upon two years of work improving our economic model, we’re now putting further emphasis on changing the trajectory of our top line performance. Our focus is to find the right balance between maintaining our cost discipline and making appropriate, targeted investments to gain back market share.”

Each quarter they have pointed to economic conditions and talked about all the changes they have made to improve performance going forward. While the past 18 months have certainly presented a challenge to most all apparel retailers, Gap has been struggling for the greater part of 10 years.

They have talked about remodeling and closing under-performing stores, and doing a better job of connecting with consumers. However, their peers have proven to be much more adept at responding to the constantly-evolving consumer tastes. While cost-cutting and inventory management measures have steadied bottom-line results this year, we have yet to see any of their initiatives translate into even marginal improvement of top-line results:

The company does have some things going for it, though: they have no debt and over $2 Billion in cash, cash flow and merchandise margins have been improving, and each quarter they are up against easier comps. Some analysts believe they finally have the right fashions and values for the back-to-school and fall seasons.

However, at this point we’ll believe it when we see it. Gap used to be an extremely successful retailer, with its strengths being basic apparel and value. Somewhere along the line it lost its way, no longer being able to differentiate itself from rivals or clearly define its brand identity. With the spending environment expected to remain weak through the end of the year, we don’t see Gap returning to its glory days anytime soon.


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