Gap Inc., despite its management shake-up and weak overall performances across all three core brands, is still planning its public spin-off of Old Navy next year, the firm said Thursday.
“This is a pivotal time for the company,” said Robert J. Fisher, interim president and chief executive officer, during a conference call following the release of third-quarter numbers, which were disappointing. All three core brands — Old Navy, Gap and Banana Republic — dragged through the period, as the $16 billion corporation saw its net income fall to $140 million in the period ended Nov. 2, compared with $266 million a year ago.
Comparable sales overall were down 4 percent, with Old Navy Global down 4 percent, Gap Global down 7 percent and Banana Republic Global down 3 percent.
Net sales were $4 billion, a decrease of 2 percent compared with last year.
“We are not pleased with the third-quarter results and are focused on aggressively addressing the operational issues that are hindering the performance of our brands,” said Fisher. “We continue to make progress against our separation plans, which will provide improved focus and a further catalyst for transformation.”
Fisher, the son of the late Gap founder Donald Fisher, became interim president and ceo on Nov. 7, succeeding Art Peck who was ousted. “Taking on the role is incredibly important to me,” Fisher said, adding that after serving in several capacities over the years at Gap Inc., “I’ve gained a deep understanding of the company’s operations and the retail space. I am approaching the role with a clear view of where we are and where we need to go. Clearly, the company is pressured by uneven execution.” He also said that Gap Inc. suffers from over-complexity and a lack of focus, operational discipline and efficiency in many areas.
“The board and I continue to believe in the strategic rational of the separation,” Fisher said. “As we move forward with the (separation) work, we remain confident in the value creation opportunities it presents.”
Regarding the ceo search, Fisher said, “It’s been only two weeks. I am not providing any specific criteria,” though he did say he’s seeking “a strong leadership candidate with operational excellence” who can drive creative teams with greater speed, efficiency and accountability.
Teri List-Stoll, executive vice president and chief financial officer, acknowledged that Old Navy has an opportunity to better execute on style, fit, quality and price, but is well-positioned for the holiday season, having infused key learnings from holiday 2018. Denim, fleece and activewear continue to outperform the overall brand, she said, citing market share gains in denim. However, she also said there has been too much messaging in discounting and the brand is refocusing on product stories, such as plaids and puffers.
Old Navy is pulling out of China in early 2020. “The investment to grow there would be significant,” said List-Stoll. “We’d rather spend on increasing digital opportunities and in (growing) underserved North American markets.”
Women’s wear problems at Old Navy tended to be a combination of factors including silhouettes, print and pattern misses, she said. “We just kind of lost sight of what our consumer valued, exacerbated by broader trends in the market. The primary customer is the mom. When she doesn’t find something she loves it obviously affects her willingness to shop men’s, kids’ and babies.”
At Gap, she said the team continues to focus on profitability, reducing promotional activity and improving products. Surprisingly, there has been margin improvement at Gap this year, but not at Old Navy. She also cited efforts at “closing the gap between in-store and online promotional activity” potentially leading to a boost in Gap’s brand image. The brand is also focused on reestablishing authority in denim, said List-Stoll.
“Despite the positives, we still have work ahead to restore profitability in Gap brand. There has not been enough margin improvement.”
Banana Republic’s third-quarter results “overall were disappointing. Sales were challenged due to product softness related to warmer-than-anticipated weather and an overinvestment in basics while fashion styles sold through quickly. One goal is to implement a more strategic promotional strategy and engage with consumers in new ways.
Athleta is a brand with “tremendous growth potential,” said the cfo, though she cited some softness in the business at the start of the quarter attributed to changes in the marketing messaging and how product was displayed. “We have been increasing marketing investments and working to refine the messaging to drive in-store and online traffic.” She also cited being overassorted in performance merchandise versus lifestyle merchandise last quarter.
During the call, Fisher was asked about what the future holds for Gap brand, to which he responded, “Significant improvement is required, a lot of transformation is going on and will continue with urgency. The focus on improving the profitability of the brand, adopting a strong culture of accountability and more focused investment choices.”