A Gap store in New York City.

A Gap store in New York City.

WWD

Gap Inc., hurt by restructuring costs largely involving store closings and ongoing sales declines, posted a decline in net profits to $125 million in the second quarter ended July 30, from $215 million in the year-ago period.

On a per-diluted-share basis, earnings were 31 cents. Restructuring costs accounted for 29 cents a share.

During the second quarter, the company opened 19 company-operated stores and closed 22. Square footage of company-operated stores was down about 1 percent compared with the second quarter of fiscal 2015.

Gap expects net closures of about 50 company-operated stores this year. Square footage is seen at down about 2 percent for the year.

The company concluded last quarter with 3,730 stores of which 3,273 were company operated.

Gap is forecasting 2016 earnings in the range of $1.87 to $1.92, lower than analysts estimates of $1.96.

As previously disclosed by the company, comparable sales for the quarter were down 2 percent. By division, comparable sales were negative 3 percent at Gap Global; negative 9 percent at Banana Republic and Old Navy was flat.

Net sales for the quarter were $3.85 billion compared with $3.9 billion for the second quarter of fiscal 2015.

While Gap cited some progress in the company’s turnaround, the company did not do as well as some competitors, such as American Eagle, Macy’s Inc., The TJX Cos. Inc. and Wal-Mart Stores Inc., which saw apparel upticks. However, Gap could see some improvement for back-to-school given the improving trends in the denim market, and chief executive officer Art Peck said Old Navy has picked up steam since the fourth quarter of last year.

With Old Navy, Peck said during a conference call with analysts, “We have an opportunity for a small store format. And the first one of those that we will really test will be coming online in the next several months. If you can deliver a holistic, fully assorted Old Navy brand experience in a box 8,000 square feet, it opens up a significant opportunity for us with that brand globally.”
During the call, Peck described the consumer environment, which he said was “number one on my mind…there’s obviously some strength out there in different parts of retail. In apparel specifically, the environment remains challenging. And quite frankly, it remains most challenging in the higher end of the market. And just to remind everybody, we have a very robust value portfolio with our outlet channels and the Old Navy business.

“Number two, the restructuring work that we announced several months ago: I’m very pleased that we have been decisive, and we have taken action, and, as you know, that includes some expense reduction and trimming some parts of the portfolio where we had businesses that we felt did not have the potential for long-term returns. We’re not all the way through this and we have taken action in Japan with the Old Navy fleet there, and, as we mentioned, are making progress on tuning in the BR international fleet as well.

“The third thing on my mind is the product operating model,” Peck said, noting that the company has been very aggressively focused on building “responsive supply chain capabilities,” including fabric platforming, more test-and-respond, shorter lead times or a shorter calendar.

Commenting on the divisions, Peck said Banana Republic was “clearly nowhere close to the performance that the brand is capable of, nor what we expect.”

On Gap Brand, Peck said there’s been “extremely aggressive work” involving restructuring the fleet and the cost structure and core processes, and he cited “very good product acceptance” in women’s and “a great kids’ and baby business.” However, overall, Gap is showing “nowhere close to the results that we need to see.”

On Old Navy, Peck said, “I’m very pleased with the recovery of performance from Q4.”