NEW YORK — The easy part of Gap Inc.’s recovery seems to have passed, and analysts are now questioning how strong the retailer’s near-term results will be. Ever-increasing competition, weak traffic levels, difficult upcoming sales comparisons and a new concept catering to women over 35 that likely won’t be accretive to earnings for a few years are causes for concern.
Following a downgrade of the stock late last week, Gap shares fell again in Monday trading after losing 2.2 percent on Friday.
Warning signs of a deceleration in sales first appeared when the company reported a 2 percent drop in aggregate June same-store sales, its first decrease in 25 months. That was followed by a 5 percent drop in July and a 1 percent decrease in August comps. Now, Wachovia Securities analyst Joseph Teklits is worried that “choppy” traffic and merchandise levels have continued into September, which he said will be “a telling month” testing the success of the company’s new ad campaign, featuring Sarah Jessica Parker.
A main question for Teklits is: Have efforts for the fall season been unsuccessful at boosting sales, or are core customers just not understanding or appreciating Gap’s latest looks? Teklits is calling for a 1.5 percent increase in September comps, which would compare with a 13 percent increase for September 2003.
“Product will still be the key to the company’s success from season to season, and the visibility here is no greater than for the average apparel retailer,” Teklits wrote in a research report issued Thursday, in which he downgraded Gap shares to “market perform” from “outperform” and cut earnings estimates to below consensus estimates. In light of an “up to” 40 percent off sale the company launched at Gap stores on Sept. 24 (compared with Sept. 29 last year), where customers can also clip an extra 10 percent off coupon from the newspaper, Teklits is “worried that the product and marketing efforts have carried the company as far as it can go for now.” He estimates that roughly 80 percent of Gap’s merchandise is now on sale.
According to a Goldman Sachs weekly price monitor research report released Friday, sale activity at Gap stores is “well above levels from six weeks ago.” About 42 percent of adult Gap-branded items were on sale in the just-completed week, with average markdowns of 39 percent.
Both Old Navy and Banana Republic could be feeling the burn, too. Banana launched a 35 to 40 percent off sale last week, noted Banc of America Securities analyst Dana Cohen. And Old Navy has been quite promotional of late, as well. “While there are still opportunities, there is also still fashion risk in this business,” Cohen said in a Friday research report, in which she also reduced EPS estimates on Gap.
Gap spokeswoman Jordan Benjamin stood by the company’s current plans. “We feel like we have very sound strategy in place to move our brands forward,” she said in an interview. “We don’t have anything planned to change those strategies.” Concerning the company’s new concept, announced two weeks ago and set to be rolled out to 10 stores in 2005, Benjamin said it’s just one step the company is taking to grow. “We said we’d be able to seek a significant amount of growth opportunities,” she said.
On the competition front, said Teklits, the Gap division may be “getting out-focused and out-merchandised” by increased mall competition from J. Crew, Ann Taylor, Express, Urban Outfitters and American Eagle, many of which have been reporting positive double-digit monthly same-store sales. While he expects to see continued improvements in Gap’s balance sheet, Teklits said income statement improvements could prove more challenging as the end of the year approaches.