Gap slashes guidance, plans to ramp up marketing

Dive Brief:

Gap Inc. shares edged down 1.4% in after-hours trading Thursday as the retailer lowered its fiscal year guidance. Gap now says it expects adjusted earnings between $1.87 and $1.92 per share for fiscal 2016, missing FactSet analysts expectations of $1.95 per share.
Gap reported adjusted second quarter earnings of 60 cents per share, compared to 64 cents a share a year ago. Q2 sales were $3.85 billion, down from $3.90 billion year over year. Analysts surveyed by FactSet had expected adjusted earnings of 59 cents a share on sales of $3.85 billion. The retailer says it still expects to close 50 stores this year.
Overall Q2 same-store sales fell 2%, as last year, beating expectations of a 2.2% decline, according to analysts surveyed by FactSet. At Gap’s flagship brand, same-store sales fell 3%, up from a 6% decline last year; Banana Republic same-store sales fell 9%, versus 4% last year; and Old Navy’s same-store sales were flat, compared to a 3% gain last year.

Dive Insight:

Gap has struggled mightily to regain its footing, and its turnaround efforts for a long time failed to gain traction. But, though the company lowered its year forecast, CEO Art Peck indicated that the company is seeing light at the end of the tunnel.

Peck noted on a conference call Thursday that Gap has suffered with customers because of inconsistencies in fit, an issue that has also created a problem of returned merchandise, especially for online orders, that has wreaked havoc with the supply chain.

“When you're inconsistent on fit, [the customer] quickly learns that she's going to order a two, a four, and a six knowing that four is her size, and obviously figuring out which one fits and then sending the other two back or returning them to a store,” Peck said on the call. “And that has a drag of cost and devalued merchandise associated with it as well... [That's] a big deal for us and when we're at our best, we really kill it on fit. And she really appreciates that. But we've done too much wandering around the landscape over the last couple of years, as we've tuned and tweaked fit and not had a consistent fit.”

Peck and CFO Sabrina Simmons also said that the company will be boosting its marketing investments in the third quarter, after keeping ad spend flat in quarter two. Peck said that boosted marketing has helped Old Navy and that it’s time to do the same for the company’s other two brands as well.

“Next really is to bring the voice of the brand back, and start telling the story,” Peck said. “We really pivoted it towards traffic and digital, but we've not been telling the story about the product and about the quality of the fit, etc.—all the elements of the story to the extent that we need to. And so, as we look at the back half, that's something that's very much on my mind, as you can imagine.”