GAP TO SHUT UNITS BUT ADD TO TOTAL SPACE

Byline: Jennifer Weitzman / With contributions from Kristin Young

NEW YORK — Beating down speculation of retrenchment, Gap Inc. said Monday that it’s growing square footage by 18 percent this year in Manhattan and that upcoming closings here are part of long-term real estate strategy.
Much of the additional space will go to newer, multiconcept stores that feature Gap, GapKids, BabyGap and GapBody, while some older, single-concept stores shut down.
In Manhattan, Gap said it will close six smaller stores this year. “We have been building bigger stores in New York City over the past five years,” said company spokesman Jack Dougherty.
Gap operates 35 doors in Manhattan. The store on 42nd Street and Broadway is being enlarged to 35,000 square feet, from 15,000. The unit on 18th Street and Fifth Avenue will grow to 28,500 square feet, from 23,000, and the lease for the 57,000-square-foot flagship on 34th Street and Broadway is being renewed, Gap said.
As an example of the Gap’s urban strategy, Dougherty noted that, last fall, Gap closed two 4,000-square-foot stores, Gap and GapKids, in the South Street Seaport area, and opened a 20,000-square-foot site instead, incorporating the four Gap concepts.
The retrenchment speculation arose after Crain’s New York Business reported that Gap was closing eight locations in the city due to new competition and the economy.
However, Dougherty said, “It is a routine real-estate shuffle. We open and close stores everywhere.” He added that the real-estate strategy has “been in place and discussed well before the economic downturn or before we ever bought leather pants,” which was a big buy last year.
By adding square footage to key locations, Gap is attempting to improve its bottom line through economies of scale.
The company would not specify about closings in other cities, but did say the real estate strategy for Manhattan is not exclusive.
Retail analysts downplayed the six Manhattan closings, noting that it’s a small piece of the pie for America’s most dominate apparel specialty chain. Last year, the company posted profits of $288 million, a 22 percent decline, on sales of $13.7 billion. Some applauded the move to rationalize real estate as part of a long-term growth strategy.
UBS Warburg’s Richard Jaffe said he believes Gap is not reacting to a threat in the marketplace or current economic conditions, but rather is trying to optimize its New York real estate. “The multistore concept is more likely to be more profitable because of its added synergy and additional traffic,” he said, adding that they offer lower lease costs than single-concept stores.
Todd Slater with Lazard Freres said the moves could help operating margins, which he projected at historical lows of close to 10 percent this year. Gap’s lowest operating margin was in 1989, at 10.3 percent. Last year, it hit 10.6 percent. Gap stores average 5,825 square feet.
Slater acknowledged increasing competition in the specialty retail sector, from Hennes & Mauritz and J. Crew among others, but as far as Gap is concerned, the impact is still miniscule.
He said that Gap projects its retail space at 13.8 million square feet in 2001 compared with H&M, estimated at 470,000 square feet, and J. Crew, weighing in at 1.3 million. The specialty retail sector operates 292.8 million square feet, up 10 percent over the past three years.
“It just makes sense” to close small units when larger ones are nearby, said Barbara Miller, with Goldman, Sachs.
Gap also appears to be rationalizing real estate in France, where five or six stores are seen closing within the next year and a half, though three new stores in Paris are scheduled to open next month.
“Across the company, we’re watching costs and it’s been a tough year, but these real estate shuffles have been in place for more than six months,” said Dougherty.
Earlier, Gap said it would close three smaller stores in the U.K. to make room for two new stores.
The company has said it will slow its store growth from between 17 percent to 20 percent in 2001 to about 15 percent in 2002 and 2003.

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