Analyst urges Gap to close 175 additional stores

Dive Brief:

In a note to clients issued Wednesday, Deutsche Bank analyst Paul Trussel expressed serious reservations about Gap Inc.’s prospects and said the retailer hasn’t closed enough underperforming stores, Fortune reports.
Despite a series of store closings in recent years, Gap North America will still operate 175 too many stores by the end of the year, according to Trussel.
The recommendation comes after Gap reported that March same-store sales dropped 6% compared to a 2% gain during the same period last year. Gap also said it entered April with more inventory than planned, which will impact its Q1 gross margin rate.

Dive Insight:

Gap Inc. started out as a groovy San Francisco-based retailer of basics and eventually helped shape fashion in the 1980s and 1990s. But in recent years the Gap flagship brand’s apparel has been consistently overshadowed by its lower-priced Old Navy brand, and doesn’t really seem to be on the radar on either shoppers or investors.

In an effort to revive its fashion cred, Gap has hired and then dismissed big names in fashion in record time, and its mid-priced basics have been lost in the shuffle among lower-priced fast-fashion items and higher-end luxury apparel. Even when Gap items sold well, the retailer took too much time replenishing them. A good portion of Gap stores are outlets, too, further undermining the brand.

Now even Old Navy, which has supported the company’s results in recent years, is stumbling. Old Navy’s same-store sales were flat during the 2015 holiday period, following a 5% increase in Q4 2014. Same-store sales dropped 6% at Gap’s flagship brand, declines the company blamed on apparel design missteps that have since been corrected.

Deutsche Bank's Trussel believes drastic measures are in order.

“We believe market share losses, an aggressive promotional landscape, weak traffic trends and fashion mishaps should continue to be too much to bear,” Trussel wrote in his note, according to Fortune. He believes that the retailer should have more like 375 flagship stores, a fraction of its stable 10 years ago and a far cry from its current 525 stores, plus more than 300 outlets.

For fiscal 2016, Gap forecasts earnings in a range of $2.20 to $2.25 per share, down from $2.43 per share in 2015 and significantly below average analyst estimates of $2.43 per share.