Plagued by fashion missteps snubbed as too fashionable even by its loyal customers, Gap, the nation’s largest specialty apparel retailer, said late Tuesday that its net loss reached $34.2 million, or 4 cents a diluted share, for the three months ended Feb. 2, in line with Wall Street’s consensus estimates and marking its second consecutive quarterly loss and its seventh consecutive period of year-over-year earnings declines. These results included a $15 million aftertax charge for sublease losses at the company’s headquarter facilities in California and the planned closures of distribution centers in Kentucky and Holland. Last year, the retailing heavyweight recorded income of $272 million, or 31 cents.
Sales for the 13 weeks decreased 10.7 percent to $4.09 billion compared to sales of $4.58 billion rung in for the 14-week quarter last year. On a comparable-store basis, sales declined 16 percent versus a 6 percent drop last year. All three divisions comped downward — Old Navy, 20 percent; Gap, 16 percent, and Banana Republic, 7 percent. Sales productivity also declined, down to $109 per square foot from $139 last year. Inventory shrank 12 percent at quarter’s end, despite a 16 percent growth in square footage.
“I wish I could tell you our problems are behind us,” Mickey Drexler, president and chief executive of the San Francisco-based specialty retailer, said during an afternoon conference call. “We are absolutely clear about what needs to be done and our ability to do it.”
Even with a 64 cent, or 5 percent, increase in its stock price Tuesday, to $13.55, Gap shares were trading 61.3 percent below their 52-week high of $34.98, reached last May 17. Earnings and other news were released after the close of trading.
While Drexler recently took over everyday operations of Gap’s namesake division, Gap Tuesday announced senior merchandising management changes at its flagship brand, hoping to alleviate some of the pressure for executives who previously were “asked to do too much,” according to Drexler.
Marka Hansen will serve as executive vice president for Gap adult and oversee all general merchandise management, planning and product for the more than 1,100 Gap adult stores. Hansen, who has worked at Gap for more than 15 years, previously held senior merchandising management positions in both Gap and Banana Republic. Hansen reports to Drexler.
Nancy Green, previously responsible for Gap adult, will oversee women’s merchandising, and Tracy Gardner, previously head of men’s merchandising at Banana Republic, will oversee men’s merchandising. Both will report to Hansen.
Tara Poseley will assume the title of senior vice president for GapKids and BabyGap and Barbara Wambach has joined the company as executive vice president at GapBody.
Last month, Gap split its international and domestic divisions.
Once the new team has the chance to get the product right, Drexler predicted customers will return. “Customers want to shop with us,” he said. “They told us what is important and they want us to be successful.”
Back in the third quarter, Drexler said he was not satisfied with the appearance of spring merchandise. But looking to the fall, Drexler said that the defined “franchise merchandise” consumers expect, and from which Gap had walked away in recent years, is in place. Women’s stretch pants, khakis, fleece and ribbed cottons were among the items mentioned.
In another step to reduce expenses, Gap is cutting its square foot growth to 3 percent this year, opening 170 to 190 concepts, or 110 to 120 locations, weighted to the first half. The figure compares to double-digit expansion rates in years past.
Dramatizing its fall from grace, 2001 earnings per share fell to a 1 cent loss from a $1 profit in the prior year. Gap’s $8 million net loss included the previously announced tax charge of $131 million and aftertax charges of $73 million. Earnings last year were $877 million. Sales rose 1 percent to $13.8 billion, compared with $13.7 billion, and decreased 13 percent on a comp basis.
While calling 2001 “our most difficult year ever,” Drexler said in a statement, “We’re working quickly to improve performance and deliver our customers the style, quality, value and fashion they expect from Gap, Banana Republic and Old Navy.”
Commenting on the company’s year-end debt and liquidity position, subjects of growing scrutiny, Heidi Kunz, Gap’s chief financial officer, said, “Although debt levels were up slightly for the year, we are extremely pleased with the progress we have made in improving our cash position. Our cash flow before financing improved by nearly $1 billion, to positive $370 million this year versus a negative $580 million last year.”
As previously announced, the company has received $1.3 billion in commitments for a new two-year secured bank credit facility, subject to closing conditions. In addition, it said Tuesday it intends to issue $1 billion in convertible notes with specific terms to be determined. The company expects to complete the note offering next week, subject to market conditions. This offering is part of the company’s strategy to fund itself conservatively and will “leave us well funded throughout 2002 and 2003,” Kunz said.
However, the likelihood of a quick turnaround is slim. Looking ahead, Kunz said February comps are so far running 17 percent behind those of last February, below expectations. February 2001 comps declined 11 percent.
More drastic measures may be needed to right the Gap’s course. Retail analysts and consultants are looking for more than merchandising modifications. Todd Slater, an analyst at Lazard Freres, said he is looking for the firm to shrink the Old Navy chain, rationalize its store base and improve the quality of its merchandise across all three brands, among other moves.