Gap Inc. continued to struggle in the third quarter — and it doesn’t expect an improvement anytime soon.
Hurt mostly by restructuring costs, warm weather and continued weak trends at the Gap and Banana Republic brands, the retailer reported Thursday that its net income fell 29.3 percent to $248 million in the quarter ended Oct. 31.
In the year-ago quarter, the company reported a net profit of $351 million. Net sales last quarter declined 2.9 percent to $3.86 billion, from $3.97 billion a year ago.
“With a challenging third quarter behind us, we are sharply focused on holiday execution across all channels,” said Art Peck, Gap’s chief executive officer.
On a comp sales basis, Gap Global was down 4 percent, Banana Republic Global was down 12 percent and Old Navy Global was up 4 percent. Gap’s shares slipped a bit, 1.2 percent, to $25.09, on Thursday prior to the report after the market closed, and continued to drop another 0.8 percent after the close.
Beyond the third quarter, Gap Inc. sharply reduced its full-year earnings outlook down to between $2.38 and $2.42 a share, from its previous forecast of $2.75 and $2.80 a share.
The guidance excludes $130 million to $140 million in restructuring charges for the year.
In the last quarter, Gap earned 61 cents a diluted share, but excluding charges from the restructuring strategy unveiled in June, the company earned 63 cents a share. Earnings per share met Wall Street’s expectations.
The restructuring calls for closing about 175 specialty stores in North America over the next few years, with about 140 closures this fiscal year. The changes will not impact Gap Outlet and Gap Factory stores. Gap will also close “a limited number” of European stores this year. In addition, about 250 jobs were being cut at Gap’s North American headquarters.
The bright side is that inventories are in line heading into the fourth quarter, the company continues to manage expenses tightly and Old Navy continues its winning ways with strong consumer acceptance of its products. The corporation continues to keep marketing expenses down, pending better product development and consumer acceptance.
“We spent a lot of time in Q3 focused on inventories. We came into Q4 with inventories in very good shape,” Peck said during a conference call with analysts.
“There is a very promotional environment in Q4 and we are prepared to play there,” Peck said.
He also said the company will continue to be “very disciplined in Q4 with expense controls.”
“I am very confident we can win, not on the basis of anything other than the work the teams are doing to position the brands for better and more consistent performance as we get into 2016,” he said.
Strategic actions, including store closings and staff cuts, led to $13 million in costs last quarter, while those actions year-to-date amounted to $107 million in costs, according to Sabrina Simmons, chief financial officer.
She also said Gap Inc.’s net sales were about flat on a constant currency basis, that the 3,346-unit retailer ended the third quarter with inventory per store down 4 percent year-over-year, and that fourth-quarter inventory will be about flat.
Peck said the two biggest surprises were that Banana Republic “significantly decelerated with fall product and that the consumer more broadly pulled back on apparel purchasing.” As reported, Marissa Webb in October was ousted as executive vice president and creative director of Banana Republic, indicating that business at the upscale Gap Inc. division still lagged. Gap Inc. continues to have its minority investment in Webb’s own collection business.
“I have confidence in the current team. I have confidence in the team owning spring and summer,” Peck said about Banana. “I was not expecting and I am very disappointed with the deceleration seen in particular in the back half.”
Regarding Old Navy, Peck said the value division “continues to develop product very consistently with the filters and processes they have been using over the last couple of years….We are seeing excellent product acceptance.”
However, Old Navy did suffer a blow in October when Stefan Larsson, credited with igniting the chain’s performance, left to become ceo of Ralph Lauren Corp. Jill Stanton, executive vice president of global product at Old Navy, is heading up the division while it searches for a new global brand president to succeed Larsson.
At Gap brand, Peck cited issues around delivering product that’s consistent in its fit, degree of femininity in its silhouettes, and degree of optimism in its color story. Gap brand must be casual, optimistic and American in its image.
Traffic is strongest at Old Navy, weakest at Gap and Banana is somewhere in the middle.
In a breakdown of where the opportunities and strengths are by category and division, Peck said outerwear and sweaters haven’t kicked in yet at Old Navy. “We haven’t had that cold snap yet that starts to get those businesses going.” On the other hand, denim has been strong, as has “the full family active expression, higher than market growth, in the box all the way down to baby.…We are very bullish over the long run about what that category is going to drive for the brand.”
Simmons said the company is very pleased with its underlying business in Canada and Asia and that reported declines are due to foreign exchange rates. The business in Europe is “a little more mixed,” she added.
At Gap brand, Peck cited shortfalls in women’s knits, dresses and denim. Knits were underdeveloped in 2015 and the company conceded market share. “We have very intentional development to hopefully more than reclaim our fair share of the knits business,” the ceo said, adding, “There should be a terrific accessible dress business at Gap. We left a bunch of money on the table. With denim, this year I see much more intentional development to create multiple reasons to buy. I feel good about denim development.”
Still, according to Simmons, the company is not expecting “big meaningful turns in the trends at both Banana and Gap” this year.