Fashion, store traffic and real estate problems persist, but Gap Inc. pulled off a good fourth quarter in a tough economy, thanks to expense reductions and inventory controls.
And the retailer plans to stick to that agenda this year. In presenting his plan to Wall Street, Glenn Murphy, who joined Gap Inc. as chairman and chief executive officer in August, said the chain will sharply cut back on its North American store-opening program this year and downsize many existing units.
On Thursday, the San Francisco-based specialty retailer said net earnings for the quarter ended Feb. 2 rose 21 percent to $265 million, or 35 cents a share, from $219 million, or 27 cents, in the same period last year. The earnings gain came amid continuing issues over consumer response to merchandise and getting traffic back in the stores, as total sales dropped 5 percent to $4.68 billion from $4.91 billion. Same-store sales dropped 3 percent.
For 2007 overall, net earnings gained 7.1 percent to $833 million, or $1.05 a share, from $778 million, or 93 cents, in the prior year on sales that fell 1 percent to $15.76 billion from $15.92 billion.
In a conference call after the stock market closed, Murphy stated that the company has "an unwavering commitment to developing great product. But more work needs to be done. We need to deliver to stores products that are truly reflective of what each brand stands for."
However, in detailing the top priorities for 2008, Murphy stressed that the company will "improve our earnings with a focus on growing margin dollars. We understand the importance of top-line growth and store comps, but in this environment it is the prudent approach to focus on growth on margin dollars."
He said Gap was "embracing a culture of cost-saving management."
Added Sabrina Simmons, chief financial officer: "Top-line growth and comp-store sales are important, but our primary objective for 2008 is to drive bottom-line earnings. Tightly held inventory levels should reduce margin pressures."
Murphy added that, since he took the helm of the beleaguered business, he has visited more than 350 Gap Inc. stores — and that he sees plenty of room for alterations. "With over 40 million square feet of leased space, the real opportunity is reducing square footage per point of distribution and less so in reducing location," he stated.
He cited a "renewed focus on return on invested capital" involving "right sizing, remodeling and repositioning the stores....The only real growth in square footage will be in franchising international markets. We will open new stores in North America only in very select situations. This is an important change in our real estate strategy."
In terms of lowering costs: "Our biggest area is on cost of goods sold. Our current [cost] base inside the business is nowhere as low as it should be."
He also cited labor management as another area earmarked for cost control. The company is investing in a new system to manage labor that will be in place by the end of the third quarter.
Last year, he said, Gap successfully "restructured" to be "brand-centric, serious about managing inventory, driving better margins and refining the target customer." In addition, a "complicated bureaucracy was simplified" and the company reduced payroll by about $100 million.
At Old Navy, the largest and most troubled division, "I do believe in many of the strategic initiatives," including creating a faster pipeline, and integrating the marketing with the merchandising, as introduced by former president Dawn Robertson. "Dawn and I simply disagreed on how to make this happen," Murphy said. Robertson left the division two weeks ago.
At Old Navy, "there is a fashion component and there is a family component, and the most important part is a value component," Murphy explained. "Perhaps we pursued a strategy more devoted to one of the three at some times. I am pretty confident that the imbalance can be rectified for back-to-school. We're still out of balance for the first half, but it will be improved for fourth quarter."
Gap named Tom Wyatt as interim president, but there has been wide speculation he could move into the position on a permanent basis.
"I've been here for over seven months. I feel even better about the business than when I joined on that fateful day in August," Murphy said. "We have great brands and a very diversified business."
The company is forecasting 2008 net earnings per share in the range of $1.20 to $1.27 and operating margin from 8.5 to 9.5 percent. Also, Gap will decrease capital spending by $200 million, to $500 million, and only open 65 stores in North America and 35 in Europe. There will be about 85 closings in North America, most of which will be the Gap brand.
By division, Banana Republic is the least troubled, posting a fourth-quarter comp-stores sales gain of 2 percent and total sales of $764 million versus $766 million. Gap North America was down 5 percent on a comp basis, with sales of $1.3 billion from $1.5 billion, while Old Navy North America fell 5 percent on a comp-store basis, with total sales of $1.8 billion compared with $1.9 billion.
The international division fell 1 percent on a comp basis, with total sales of $510 million, up from $497 million, while Gap Direct posted $289 million in sales, which rose from $252 million.
For the year, comparable-store sales dropped 5 percent at Gap North America, 7 percent at Old Navy, 1 percent in international and rose 1 percent at Banana Republic. Gap's total sales fell to $4.5 billion from $4.9 billion; Old Navy fell to $6.2 billion from $6.5 billion; international rose to $1.6 billion from $1.5 billion, and sales were up 1 percent at Banana Republic to $2.5 billion from $2.4 billion. Gap Direct hit $903 million in sales last year.
@chanel and @pharrell dropped what’s being dubbed as the world’s most exclusive sneakers yesterday. The Adidas Originals NMD Hu, which Williams designed in collaboration with Chanel and @adidasoriginals, has a waiting list of over 120K people who pre-registered online at chanelatcolette.fr –– and only 500 pairs are on sale. The singer predicted the resale value of the shoes could reach $40K. Read the full interview on WWD.com. Link in bio. #wwdfashion
@imanshumpert is diving deeper into his creative endeavors and relaunching his clothing line, Post 90s, and is helping to raise money for the hurricane victims in St. Maarten with a jersey he’s designed with his brother. The Cleveland Cavaliers player talked to WWD about kneeling during the national anthem, working with fashion brands and how he wants to be more than an @nba player. Read the interview on WWD.com #wwdfashion (📷: George Chinese)
Not only does #TheProfit return to CNBC tonight, but @marcuslemonis has launched @shopmarcus, a new shopping and lifestyle retail experience in Aspen and Chicago, with more locations to come. The retail stores offer in-store stylists and a variety of contemporary womenswear selections.
“It’s life, I’m going to face it,” @mingxi11 sighed. “I fell, but you know, I think the most important thing is that I get back up. I had the love, the help from my sister — the girl next to me Gizele [Oliveira] — she’s so nice. When I went backstage everybody was trying to comfort me like ‘Oh Ming, it’s OK.’ I’m really, really touched. I think it’s them who gave me the courage to go back on stage for the finale,” Xi told WWD of her fall at the @victoriassecret fashion show. (📷: David Fisher) #wwdfashion #vsfashionshow #victoriassecret
@louisvuitton tapped @therealpeterlindbergh for its latest city-centric photo book, which is part of a series called Fashion Eye. The primarily black and white book captures the spirit of Berlin in 57 images shot between 1989 and 2019. “Berlin is an inspiration for me, more than a city. I mean @millajovovich is simply Berlin!” said Lindbergh. #wwdfashion
“You know, I think audiences expect a certain performance so I have to deliver to them what they’re expecting to a certain degree. But I’m also a different actor and a different person, I have my own spin on the character,” says @noahegalvin of his takeover of the leading role in “Dear Evan Hansen” following the departure of @bensplatt, who originated the role. Read WWD’s interview with the 23-year-old actor on WWD.com #wwdeye (📷: @jilliansollazzo)
For pre-fall 2018, @etro created richly-colored wonderland, using tapestries, textiles and wallpapers from the Eastern world at large. The line featured floral and graphic prints and jacquard motifs, like this two-piece look featured here. #wwdfashion (📷: Giovanna Pavesi)
@kith is moving into children’s. The men’s and women’s streetwear brand has launched Kidset, a Kith kids line located in New York at 64 Bleecker Street. The line includes mini versions of staple Kith pieces like the Astor bomber jacket and the Kith box logo sweatshirts, along with a wall that can display up to 120 pairs of shoes from @adidas, @newbalance, @timberland and more. #wwdfashion
“I just wanted to create this fully rounded character, but I do think what excited me most was just the opportunity to give a group of people representation that I feel needs it. I like to do characters in projects that stand for something and Karolina definitely does, so that was really exciting to me,” @ginnygardner says of her new role in @hulu’s “The Runaways.” Gardner plays Karolina Dean, a queer superhero, which is a rarity for @marvel. Read more about Gardner’s character on WWD.com #wwdeye (📷: @dandoperalski)