Gap Inc. may be optimistic about its prospects, but Wall Street isn’t so sure.
This story first appeared in the February 26, 2016 issue of WWD. Subscribe Today.
The retailer’s shares fell 3.3 percent in after-hours following its release of fourth-quarter and year-end results. Gap shares closed down at $26.70.
The decline in the share price followed the news that net income fell 33 percent in the fourth quarter ended Jan. 30 to $214 million from $319 million a year ago as the retailer continued to confront weak sales in all of its major divisions.
Art Peck, chief executive officer, also admitted to a series of fashion “misses” during the year that impacted the Old Navy and Banana Republic brands, which ranged from too many sweaters to armholes on jackets that were too small.
For the year, earnings dropped 27 percent to $920 million, from $1.26 billion.
The company reported adjusted diluted earnings per share of 57 cents for the fourth quarter ended Jan. 30, which did meet analysts’ estimates for the period.
For the year, adjusted earnings per share came in at $2.43, excluding the impact of strategic actions involving store closings and personnel cuts.
On a reported basis, the company’s diluted earnings per share were 53 cents for the fourth quarter and $2.23 for the year. The company expects diluted earnings per share for 2016 to be in the range of $2.20 to $2.25, roughly flat to last year’s.
For 2015, net sales were $16.2 billion. Fourth-quarter net sales were $4.4 billion.
Overall sales on a comparable basis in the fourth quarter were down 7 percent, and for the year, comparable sales were down 4 percent.
By division last year, Gap Global comparable sales fell 6 percent, while Banana Republic Global slipped 10 percent and Old Navy Global came in flat.
“With a year of transition behind us, I’m confident that we have the right strategies in place to fuel our long-term growth,” said Art Peck, chief executive officer of Gap Inc. “We made significant progress in 2015 transforming our product operating model, enabling us to be more responsive to trends and market conditions, and consistently deliver on-brand product collections.”
Peck continued, “Our brands are strengthening their connections with customers through digital, and especially mobile, enhancements that create richer experiences whether shopping online or in stores, or any combination of channels.”
In a recap of the divisions during a conference call, Peck acknowledged some fashion misses, and pointed out that Old Navy is still searching for a successor to Stefan Larsson, who last year became ceo of Ralph Lauren. “I want to take my time so that looking forward, I understand what is the right profile in that seat and understand the talent inside and outside the company,” Peck said.
He sees “long term continuous growth” of Old Navy given its “compelling value proposition” and “potential to hunt around the world.”
He acknowledged Old Navy “hit a bump in the road in Q4,” with a couple of style misses, excess clearance inventory and an unexpected drop in traffic, though he expects the business to get back on track.
“We are always going to have some style misses, obviously,” Peck said. “One of the bigger style misses, tops went to a silhouette that was a little shorter and boxier. It was a style that didn’t register with a lot of customers.” Peck also said the company got a little bit over-assorted on sweater styles.
Banana Republic last year was taken to a place where it was “leading on fashion and trend” though that wasn’t what the customer desired, Peck said Now the company is back focused on “classic, appropriate, expected aesthetics of the brand.” Another miss was with women’s jackets. Many customers found it difficult to get their arms through the arm holes, Peck noted. Last fall, designer Marissa Webb was dismissed as creative director.
Athleta, Peck said, delivered a very strong back-half performance and is in “right in the sweet spot of lifestyle trend, fundamentally omnichannel. We continue to be very bullish about the upside potential.” Athleta grew its footprint to 120 U.S. store locations and is scheduled to open about 15 additional U.S. stores this year. A new category for the brand, Athleta Girl, will launch in the summer, offering “versatile, performance-based clothing” to girls 6 to 14 years old.
Gap, Peck said, went through “a rebuilding year” with new leadership and efforts to get the brand “back on its casual, American, optimistic aesthetic, and rightful share in key categories.”
This year Peck sees “a renewed energy” in Gap stores, which he attributed to the field team and to having products that “light the stores up…I see the aesthetic coming through very strong.” He cited progress in knits and denim where the chain is striving to recapture its “rightful share.”
Despite the disappointing Gap Inc. performance last year, the company can still be competitive, Peck maintained, due to its size and its portfolio of brands. He also cited the company’s strong balance sheet, which enables ongoing supply chain and technology investments, and its operating discipline.
Among the goals for 2016 are to drive positive comps, though positive comps are not necessary to meet the profit forecasts, according to Sabrina Simmons, chief financial officer. Another goal is to be less promotional and keep inventories down.
Also last year, Gap Factory and Banana Republic Factory launched on a dedicated e-commerce platform.
For fiscal year 2015, the company generated free cash flow of about $870 million.
Also, the company distributed about $1.4 billion to shareholders through share repurchases and dividends, showing a commitment to return excess cash to shareholders.