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Gap gives tepid profit forecast as retailer pursues comeback

Saturday, February 27, 2016 - 08:56

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Gap Inc, which has vowed to make a comeback later this year, is underwhelming investors with its goals for 2016.

[NEW YORK] Gap Inc, which has vowed to make a comeback later this year, is underwhelming investors with its goals for 2016.

The company expects profit this fiscal year to be US$2.20 to US$2.25 a share, including a 19 US cent drag from foreign-exchange effects, according to a statement Thursday. Analysts have estimated US$2.44 on average, with projections ranging from US$2.09 to US$3 a share.

Shares of San Francisco-based Gap fell as much as 5.1 per cent to US$26.20 on Friday. That followed a 12 per cent rally for the stock this year as investors bet on the company's turnaround.

The forecast signals Gap is struggling with its plan to reignite growth. On top of a longer-term trend of consumers spending less on clothing, unseasonably warm weather and a strong US dollar have weighed on results.

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The company's lower- price Old Navy chain had propped up the business, but has shown signs of slowing recently. Comparable sales, a key measure for retailers, fell 8 per cent at Old Navy in the fourth quarter from the same time a year earlier.

"They need strong customer acceptance of product to get the business model moving again," Oliver Chen, a New York-based analyst at Cowen & Co, said in a note to clients.

Excluding some items, profit was 57 US cents a share in the quarter ended Jan 30. That matched analysts' estimates, after Gap gave preliminary results of 56 US cents to 57 cents earlier this month. Net income tumbled 33 per cent to US$214 million.

Gap Brand

For the Gap brand, sales online and at stores open at least a year slipped 3 per cent last quarter, the company said earlier this month. By that measure, sales plunged 14 per cent at the Banana Republic chain.

Chief executive officer Art Peck, who took the job a year ago, has reshuffled management to try to boost performance at the Gap and Banana Republic brands. He has said his comeback plan will begin to pay off in the spring. The company lost Old Navy President Stefan Larsson to Ralph Lauren Corp. last year, putting additional pressure on management. Mr Peck said on the earnings conference call he will take his time naming a permanent replacement for Larsson.

While the company's goal is to return to positive comparable sales this year, that isn't necessary to achieve Gap's guidance for 2016, chief financial officer Sabrina Simmons said on the call. 

To boost sales, Gap is focused on speed in 2016. It wants to cut down the time it takes for an item to move from a design concept to store shelves, Mr Peck said on the call. He said he's "pleased" with the improved quality of clothes at the Gap and Banana Republic chains.

"Fashion misses across the portfolio drove 2015 weakness," Mr Chen said in his note.

"Prioritization of speed and supply chain could help in delivering improved looks, faster."

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