Gap Inc., suffering another poor quarter, nonetheless remains confident going forward with its plan to spin off Old Navy into a separate public company next year.
On Thursday, the $16 billion Gap reported that earnings in the second quarter ended Aug. 3 practically halved, declining to $168 million from $297 million in the year-ago period, while comparable-store sales fell 4 percent, with Old Navy down 5 percent. The business was hurt by slowing traffic and product demand.
But according to Art Peck, Gap Inc. president and chief executive officer, “Separation activities remain on track and we’re making excellent progress.”
He also said during a conference call after the quarterly results were released that to get Old Navy back on track “no stone is being left unturned.”
He acknowledged that softness in women’s became more broad-based. “She wanted more choice and more newness,” Peck said. “Obviously we’re not pleased with the performance, but we did come into the quarter knowing it would be challenging.”
Peck said Old Navy is still facing some challenging traffic trends in Q3 but “leaning into denim, active and fleece, all of which had positive comps in Q2” and “digging exceedingly deep on marketing effectiveness,” including reassessing the mix of marketing through various channels.
This month, Nancy Green, head of the fast-growing Athleta division of Gap Inc., which is seen hitting $1 billion in sales next year, became president and chief creative officer of Old Navy. Green now leads Old Navy’s design, production, merchandising and marketing functions, and reports to Sonia Syngal, president and ceo of Old Navy. It’s Green’s third stint at Old Navy, and she will be a critical factor in the efforts to get the business back on track. The appointment “unites product and marketing functions under a single leader,” Peck pointed out.
Peck emphasized confidence in Old Navy, stating it remains an “exceptional business with exceptional economics…We see a lot of white space for continued store expansion. The fundamental model works,” despite “significant misses on execution.”
“The view on the power of the brand remains unchanged,” Peck said.
Last quarter, with overall traffic and demand for product below expectations, Gap Inc. was forced to elevate promotional activity. However, the company was disciplined and came out of the quarter with lean inventories and adjusted buys for the back half of the year to match traffic trends.
Currently, traffic remains challenging, Peck said, though some Q2 marketing dollars have been shifted to Q3, leading to expected improvement in customer response to product.
In other results, diluted earnings per share were 44 cents compared with 76 cents in the year-ago period, and 63 cents on an adjusted basis, which exclude costs associated with the planned spinoff, tax impacts, and restructuring related to store closings primarily involving Gap brand.
Total net sales were $4 billion, a decrease of 2 percent compared with last year. Total sales declined to just over $4 billion, from $4.09 billion a year ago. Gap brand’s comp sales were down 7 percent and Banana Republic was down 3 percent.
At Gap brand, the focus is on accelerating denim, increased marketing investment and finessing the balance of bottoms and tops. “We will continue to turn up the volume in this space,” Peck said, noting the brand is experimenting with some new store formats. “In all Gap stores you will see a proud front-and-center denim moment and windows that support that.”
With Banana, Peck said, “increasing traffic starts with improving product, providing more depth in key products, having a clear point of view, making it easier to shop and trying to attract a younger customers.”
Athleta, which is performing well, will end the year with 180 stores, and is accelerating expansion to 25 stores annually.
Corporate-wide, gross margin was down 90 basis points to 38.9 percent of sales, while the adjusted operating margin fell 140 points to 8.3 percent of sales.
Looking ahead, Gap sees comparable sales down in the low single digits for the year. Commenting on back-to-school, Peck characterized the season as “a less acute event, spread out from July to post-Labor Day.”
“We are operating in a challenging environment,” Peck said in a statement. “But I remain confident in the strength of our brands and our plans for the future as we work to launch two independent, public companies. Heading into the second half of the year, we remain highly focused on inventory and expense discipline to improve results, as well as delivering exceptional product supported by powerful marketing to drive customer engagement.”