GAP TURNS IN DISAPPOINTING QUARTER, WITH SAME-STORE SALES OFF 2 PERCENT

Byline: Jennifer Weitzman

NEW YORK — The Gap might have gotten too hip for its own good.
In a rare appearance on a Gap conference call Thursday with Wall Street analysts, Millard S. Drexler, president and chief executive, admitted that the firm alienated many of its maturer customers by being too focused on fashions for the young.
“Gap fashion isn’t tricky,” he told analysts while announcing plans to return to Gap’s reputation as the dominant retailer of casual clothes, particularly for the workplace.
Drexler discussed the firm’s quarterly performance in response to a rare disappointing first quarter, marked by a 2 percent same-store decline, reported that day.
In contrast, Intimate Brands Inc. banged out an 11 percent first-quarter same-store gain and 28 percent profit hike, led by Victoria’s Secret Stores. And Nordstrom showed a modest first-quarter profit gain but said its shift to more contemporary styles in its women’s department is proceeding on plan.
At the Gap, net income rose 16.4 percent to $235.5 million, or 27 cents a share, from $202.4 million, or 22 cents, a year ago. Gap had said last week that a cold, rainy April, coupled with a late Easter, would cause it to miss Wall Street estimates by one or two cents.
Sales ran up 19.9 percent to $2.7 billion.
The weakest divisions were domestic Gap, with same-store sales down in the mid-single digits, and Old Navy, down in the low-single digits.
Same-store sales climbed in in the mid-single digits at both Banana Republic and Gap International.
Maura Hunter Byrne, at Salomon Smith Barney, said The Gap and Old Navy suffered from merchandise misses as a result of being too young in their fashion component. But she is optimistic for the back-to-school season and in Drexler’s track record at recreating and turning around the business. “The Gap is a brand that can recreate itself over time,” Byrne said. “I don’t think [it] lost its customer forever.”
Drexler said one of his goals is better brand and size consistency, noting, for example, that the company made a mistake with capri pants, normally a staple product, when it too radically changed its fit and didn’t have enough of its best-selling cuts.
He said Old Navy “was not working” because it’s too youth-oriented, adding, “We were running the business for young customers at the exclusion of their parents.”
The Old Navy Collection for women’s casual work and eveningwear, priced at a level above other women’s merchandise in the store, will be rolled out nationally by mid-summer. The collection has tested successfully at 30 stores and will be expanded to men’s wear in the fall.
At the Gap chain, kids’ and women’s fared better than men’s. “Men’s was just plain old weak,” he said. “I cannot even tell you I was half pleased, nor were our customers.”
Drexler said men’s has had too many “knee-jerk reactions” and turned too young with the abundance of uniform-type looks, like cargo pants. “We went along that way, and it clearly didn’t help us penetrate in the market share for men,” Drexler said.
Drexler said he is looking now to clear up men’s with “smart and snappy clothes,” including adding bottoms besides khakis and jeans, including gabardine, at Gap stores to address casual dressing at work. Woven and stretch shirt lines will be expanded in men’s as well as women’s at Gap and Old Navy. Banana Republic will add more work items with lower prices to broaden its customer range.
One concern, Drexler said, was that inventories moved too quickly and markdowns on popular items affected sell-throughs on new items. Drexler said certain styles will remain on the floor longer but will be kept fresh with new colors. “We were killing off the golden geese,” he said.
At Intimate Brands, profits grew to $67.9 million, or 27 cents a share, from $52.7 million, or 21 cents. Sales increased 15 percent to $1 billion from $877.8 million.
“We are pleased to deliver better than expected sales and earnings. Both of our brands exhibited continued strong momentum,” said Leslie H. Wexner, chairman and chief executive, in a statement.
Comparable-store sales at Victoria’s Secret Stores rose 14 percent, with the relaunched Body by Victoria lingerie line, featuring a new strapless bra, producing the strongest launch results in the firm’s brand history.
Strong feedback came from the launch of Halo, the second new fragrance in its Dream Angels prestige fragrance collection. Sales at Victoria’s Secret Catalogue, including e-commerce, were up 5 percent. Bath & Body Works delivered a 6 percent same-store gain with operating income up significantly.
At Nordstrom, earnings nudged up 4 percent to $32.8 million, or 25 cents a share, from $31.5 million, or 22 cents, a year ago. Sales advanced 10.3 percent to $1.15 billion from $1.04 billion. Same-store sales rose 5.3 percent, with full-line stores up 4.9 percent and Rack outlets up 9.3 percent.
Positive same-store sales gains were seen in women’s accessories, shoes, men’s apparel, cosmetics and designer. Declines were seen in women’s, junior and children’s. As reported, Nordstrom is undergoing a major overhaul of its women’s departments to introduce a greater contemporary component. This has included the launch of Halogen and Easel urban brands and the rollout of BCBG Exclusively for Nordstrom collection.
“It will take some time before the benefits of improving our women’s merchandise mix and enhancing our store environment are fully realized, but I am convinced that we are headed in the right direction,” said chairman and chief executive John Whitacre in a statement.