NEW YORK — Come October, Gap Inc. will be expanding its offerings — in plastic.
As the San Francisco-based company reported a marginal decline in earnings for the second quarter, president and chief executive officer Paul S. Pressler unveiled plans for a new credit card program, offering customers a choice of newly designed Gap, Banana Republic or Old Navy cards that will allow holders to earn points redeemable at any of the company’s stores.
“The consumer proposition is simple,” said Pressler during the call, “one credit card to shop, earn points and redeem rewards across all three of our brands, including online and outlet stores.”
According to Pressler, current cardholders spend almost twice as much as other customers. They are also more likely, said Pressler, to shop at sister stores, with 65 percent of Gap cardholders saying they also shop at Old Navy or Banana Republic. For Banana cardholders that number shoots up to 75 percent. “We see a significant opportunity to drive sales by encouraging cardholders to purchase within Gap Inc.’s family of brands,” said Pressler. The launch date for the credit card program is Oct. 11.
While the new credit card initiative and the Sarah Jessica Parker ad campaign could be a boon for fall, second-quarter results were hampered by a dropoff in sales during June and July, as well as the company’s continued efforts to reduce its hefty debt load.
For the three months ended July 31, the retailer saw earnings slide 7.2 percent to $194 million, or 21 cents a diluted share, in line with Wall Street’s consensus estimate. Comparatively, the company reported earnings of $209 million, or 22 cents, in the year-ago quarter.
Sales inched up 1 percent to $3.72 billion from $3.69 billion. Sales at Gap remained flat at $1.2 billion while Old Navy retained its place as the company’s top revenue generator, with sales rising 6.7 percent to $1.6 billion from $1.5 billion. Banana Republic sales rose 6.2 percent to $528 million against sales of $497 million.
Kinks are still being worked out, according to Pressler. “At Old Navy our summer circulars were timed too close together, and we also feel we have an opportunity to better differentiate our marketing messages.”International sales continued to underperform, falling 4.9 percent to $445 million compared with sales of $468 million.
“Our strategic decision to reduce overall promotional and markdown activity partially contributed to the deterioration of traffic during the quarter,” said Byron H. Pollitt, chief financial officer. Pollitt also said the company closed all 10 of its locations in Germany during the quarter.
Despite the downturn, analysts remained confident in management’s leadership, but did note a lack of newness at Gap and Old Navy, as well as a late start to summer clearance activity.
“Although June and July same-store sales were disappointing, we remain impressed with the company’s margin improvement strategies, inventory management and discipline,” said Goldman Sachs analyst Margaret Mager in a preview of earnings. “We believe that management’s prudent approach to managing its business reduces earnings volatility and bodes well for the long-term health of Gap and its brands.”
The firm took a $65 million hit related to early retirement of debt, paying down $303 million to end the quarter with $2.3 billion in debt.
Better sales performance and lower interest expenses overcame early debt retirement issues for the first half.
For the first six months to date, earnings advanced 22.8 percent to $506 million, or 53 cents, against earnings of $412 million, or 44 cents, while sales rose 5 percent to $7.39 billion from $7.04 billion.
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