Don’t call Gap a “mall-based apparel retailer.” Art Peck, president and chief executive officer, doesn’t like it.
“It’s flat-out wrong,” Peck said during a conference call with investors Thursday after the company released solid second-quarter top and bottom-line results, boosted by continued strength at Old Navy and an insurance benefit from the fire in 2016 at Gap’s Fishkill, N.Y., distribution center.
“No other apparel retailer has a better, more diversified collection of profitable brands,” said Peck, who added that Gap Inc. brands are housed in a variety of venues including lifestyle centers, street locations, strip centers, outlet centers, as well as malls.
Peck, making a case that Gap Inc. is not particularly vulnerable to thinning traffic patterns at malls due to its diversity and portfolio mix of brands, said that more than 60 percent of the Gap Inc. business is value oriented — that includes Old Navy, Gap factory outlets and Banana Republic factory outlets. Those formats are typically in outlet, value and strip centers, rather than malls.
He also stressed that the company has been diligently rationalizing its retail square footage, indicating that the company has shed five million square feet over the last 10 years in North America. He said, although the company still operates a lot of stores, it has been “aggressive and strategic” in closing weaker doors. “The approach to real estate is disciplined and balanced,” he said, later adding, “We continue to responsibly and aggressively manage our exposure to mall-based real estate.”
Gap, he said, has the oldest fleet in the corporation and the highest level of exposure in older centers of which “some are fantastic, some will go away. We are going to really aggressively and responsibly manage our real estate.”
In its second-quarter report, Gap Inc. said net income more than doubled to $271 million from $125 million in the year-ago period. The company increased its adjusted earnings per share guidance to a range of $2.02 to $2.10 a share for fiscal 2017, from $1.95 to $2.05. Gap Inc. continues to expect comparable sales for fiscal year 2017 to be flat to up slightly.
Overall, comparable sales in the quarter were up 1 percent, with Old Navy Global up 5 percent, while Gap Global was down 1 percent and Banana Republic Global fell 5 percent.
“With a third consecutive quarter of comp sales growth, we are seeing our investments in product, customer experience and brand equity begin to pay off,” Peck said. “Based on the strength of the first half, we are pleased to increase our full-year earnings guidance.
“As we continue to focus on long-term growth, we are accelerating our strategies that put the customer at the center of everything we do — including a focus on product categories where we have clear differentiation, continued investment in our online and mobile offerings, and taking advantage of our operating scale to drive speed to market, responsiveness to customer demands and efficiency.
“We are a financially healthy company with ample investment capacity for growth.”
Key categories include denim, bottoms, active, kids and baby. Peck said these “generate most loyalty.”
He said Gap has an 8 percent market share in denim, a 3.5 percent market share in active and a 10 percent market share in kids and baby apparel.
“Our portfolio allows us to play at scale — scale drives efficiency, speed and profitability.”
Peck said Gap Inc.’s Athleta brand “continues to go from strength to strength, outpacing industry growth.” He characterized Old Navy as “the fastest-growing apparel brand in the U.S. with a long runway for growth in front of it.”
Meanwhile, Banana Republic “continues to see challenges, for back half the team is entirely focused on stabilizing the business and fixing fashion mixes.”
He said he’s pleased with improvements at Gap, adding, “We know we have more to do.” He cited a little bit of softness in Gap’s girls business but said “the bigger issue is to buy into some big ideas with more confidence.”
“Gap and Old Navy have seen nice traffic relative to the industry,” Peck said.
Overall, the said the company has been “backing off some of the promotional intensity” of previous years.
Peck declined to comment about whether he would ever consider partnering with Amazon, but did say, “We feel very strongly [about] expressing our brands and controlling the expression and delivering an experience. I have been open in saying that we will always be where our customer is. We are not closed-minded.”