The Gap footprint will likely be a few sizes smaller in the near future.
Of the 775 Gap brand stores globally, there are “hundreds of stores that likely don’t fit our vision for the future of Gap brand specialty store, whether in terms of profitability, customer experience, traffic trends,” Art Peck, president and chief executive officer said during a conference call on Tuesday.
He said “the biggest challenge with the Gap brand is largely a function of certain legacy element, which we understand and recognize. A big one specifically is the real estate obligations that currently encumber the business.”
For years, Gap has been reducing its store fleet and shrinking its store size, but Peck conveyed that the company will get even more aggressive in the near future to shed weak locations.
Gap stocked slipped late Tuesday after the company reported its earnings and plans to downsize Gap brand, but on Wednesday morning the stock rose 3.5 percent or 86 cents to $25.74. Wall Street typically reacts positively to downsizings and cuts.
Gap Inc., lifted by its Old Navy, Athleta and Banana Republic divisions. said its net income rose to $266 million in the third quarter compared to $229 million in the year ago, offsetting the ongoing weakness at the Gap brand.
Peck said the company thinks of the Gap brand as having three interelated pieces “on which we can and will make discrete decisions. There is a healthy and growing online business,” representing about 20 percent of the brand’s total sales. He also said the 500 outlets around the world is a profitable business representing about 30 business of the business.
But the regular specialty stores are underperforming overall, though there is an “extremely broad” range in the performance of the specialty stores “from the very best to the very worst.
“Addressing the bottom half of the fleet could represent over $100 million of earnings contribution opportunity and it is that portion of the fleet that is dragging down the brand. This is the piece of the business that we are firmly committed to addressing with urgency.”
“You have my commitment that while this type of strategic action on the fleet is overdue, I am going to take the action to get this one done and get this one behind us.”
Year-to-date, 109 company-operated stores, largely Old Navy and Athleta, were opened, while 56 stores primarily Gap and Banana Republic were closed. The company ended the quarter with 3,218 company-operated stores.
Peck said he was pleased with “continued solid performance from Old Navy, Banana Republic and Athleta leading into the important holiday season. “We are clearly not satisfied with the performance of Gap brand. We know this iconic brand is important to customers, and we are committed to taking the bold and necessary steps to ensure that it delivers value to shareholders.”