Gap Inc. and its ubiquitous clothing chains helped epitomize the middle-class American shopping experience for decades. But its second quarter results, in which the San Francisco-based company posted a comparable sales gain of just 1.0 percent, underscore a more downscale course for the retail industry and American consumers.
As a result of lackluster performance, Gap Inc. plans to close 200 underperforming Gap and Banana Republic stores over the next three years, while opening about 270 stores among the Old Navy and Athleta brands, and what the company calls “value expressions.” The move will leave Gap with about 70 net new stores, according to a company statement.
On the surface, the decision looks like a continuation of the ongoing store closures that mall-based apparel brands are facing as a sector. Yet Gap Inc. finished the second quarter in a strong cash position. It reported $1.6 billion in cash and cash equivalents, and $270 million in free cash flow. Industry experts say the company is simply following current pricing trends in U.S. retail.
“The Gap is simply following their numbers,” according to Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment banking firm headquartered in New York City. “They have been continually closing stores, and their upscale chain has not been viable for years. The two businesses that get de-emphasized have been bad for a decade.”
Unlike other retailers closing hundreds of stores, Gap Inc. is unlikely to approach landlords to make a plea for concessions like rent or lease term reductions, especially because they have reported so much cash on their balance sheets, Davidowitz says. Typically, landlords extend such concessions to companies that are struggling to pay rents.
Instead, Gap could try to focus only on operating stores whose rent falls below a set manageable cost, he says. “Nobody is saying that everything is closing,” Davidowitz notes. “All Gap is saying is, ‘here is our business of the future.’”
As of second quarter, Gap operated 834 Gap North American stores, down 10 units from January. As for Old Navy, the company operates 1,051 North American stores, up eight units from January.
Still, landlords will likely have to prepare for a future in which Gap Inc. will focus more on Old Navy locations, and recent equity research supports that perspective. In a recent note, Jefferies analyst Randal Konik estimated that the Old Navy brand alone is worth 30 percent more than the total enterprise value of the retailer, according to a synopsis. Konik also estimated that Old Navy generates about 75 percent of the San Francisco-based company’s profits.
The pricing dynamic has likely played an important role in Gap Inc.’s decision, Davidowitz says. Consumers are spending less on regularly-priced apparel items and supporting off-price chains like T.J. Maxx and Burlington, which are steadily expanding.
Old Navy has generated strong sales for the company. In the second quarter, same-store sales for the Old Navy brand increased by 5.0 percent, and total net sales were $1.7 billion, according to the company. Gap’s net sales were $1.2 billion, and its same-store sales decreased by 1.0 percent.
Old Navy is not mall-based, so traditional mall landlords are not likely to benefit from its productivity. Athleta, the recent fitness and lifestyle offshoot, is also achieving satisfactory growth for Gap Inc. It could even take over Gap locations that are slated to close over the next three years, Davidowitz notes. There is, however, a caveat.
“A lot of people are in that business, and now [the concept] is everywhere,” he says, adding that the brand is still proving itself.