Art Peck

Gap Inc., impacted by weak traffic, restructuring costs and the fire at its Fishkill, N.Y. distribution center in August, reported net earnings fell 17.7 percent to $204 million in the third quarter ended Oct. 29, compared to $248 million a year ago.

Comparable sales for the third quarter were down 3 percent, including an estimated negative impact from the Fishkill distribution center fire of about 2 percentage points.

The poor results sent Gap’s shares down 4.6 percent in after-hours trading, or $1.42 to $29.29.

Gap sees 2016 earnings per share in the range of $1.41 to $1.50, and adjusted EPS ranging from $1.87 to $1.92. Wall Street had expected a better outlook of more than $2 for the year.

“I’m pleased to see improved product across our brands, as well as areas of healthier merchandise margins, even against the backdrop of challenging traffic trends during the quarter,” said Art Peck, chief executive officer. “As we move into the holiday season, our teams are sharply focused on execution and delivering great experiences across the portfolio. Looking forward, we remain dedicated to utilizing our scale advantage in supply chain, as well as through knowledge sharing, in order to drive product innovation across brands and categories.”

During a conference call with retail analysts, Peck said “the retail environment and apparel environment continue to be challenging. Traffic remains challenging. We are doing work to try to beat that trend. Traffic is likely to be challenging as we move forward.” Traffic for November so far is down, Peck said.

To help combat the traffic trends, “We are putting marketing into the business in a way we haven’t in a few years,” including TV, Peck said, noting that it was important for the long-term health of the company and that he wasn’t expecting immediate results. Gap has returned to TV advertising, a Banana Republic catalogue is dropping now, and there are “transit takeovers” in different cities.

Also on the positive side, the merchandise margin rate for the quarter was up 220 basis points compared with the same quarter last year, primarily driven by Old Navy.

Ironically, the fire helped margins somewhat since less merchandise was available, enabling greater regular-priced selling. Margin improvement isn’t likely to be as evident in the fourth quarter, which is more promotional and competitive than the third quarter.

Gap said to mitigate the impact of the fire, it relied more on other distribution centers and ship-from-store capabilities, as well as a temporary fulfillment site on the Fishkill campus.

Net sales in the third quarter decreased 2 percent to $3.8 billion compared with $3.86 billion for the third quarter last year.

By division, Gap Global’s comp sales were negative 8 percent, including an estimated negative impact from the Fishkill distribution center fire of about 4 percent. Peck said Gap is moving in “the right direction and continuing to show stronger women’s business.” Gap Kids has a “significant expression of licensed product. In the fourth quarter, it has a lot of relevance.”

Banana Republic Global’s comp were also down 8 percent, with the fire having a 2 percent impact. Peck said customer feedback indicates the brand is moving in the right direction in quality and aesthetic.

Old Navy Global was up 3 percent, including an estimated negative impact from the fire of about 1 percentage point. Old Navy, Peck said, had an “excellent third quarter” marked by strong marketing, “incredible clarity of product message, clear category presentations making the store super easy to shop.”

On Athleta, “I have nothing but good things to say,” Peck said, citing a “very connected customer” and the “strong athletic trend that continues to have legs underneath it.…I expect Athleta to carry its momentum into Q4. The confluence of lifestyle and performance is powerful.”

Gap Inc.’s third-quarter fiscal-year 2016 diluted EPS was 51 cents. On an adjusted basis, the EPS came to 60 cents, excluding a 9-cent impact from restructuring costs related to store closures and stream-linings announced back in May.

During the call, Peck said the corporation is also putting “aggressive efforts into mobile” where more and more customers are shopping. “We see mobile as fundamentally where consumers start and often times end their journey.” Peck recently created the role of chief customer officer, who is focused on all aspects of the customer experience from personalization and loyalty to digital and brick-and-mortar.

Peck said last week he returned from China. “I am very bullish on the long-term opportunity in China. The economy has cooled somewhat. The consumer is cautious, but that has not impacted my enthusiasm for the long term.”

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