Can Gap cut its way to profitability?
Gap Inc. admitted that the long struggles at its namesake chain are no longer only due to merchandise and pricing issues but because it has way too many underperforming stores. CEO Art Peck said Gap will look to close hundreds of doors as it shifts focus from growth to profitability.
Last week, on its third-quarter conference call with analysts, Mr. Peck said the opportunities available for the Gap chain have faded since it dominated the marketplace for jeans and casual wear in the nineties. Industry pundits have largely blamed the challenges on the arrival of fast-fashion chains.
He said, “I do believe that the specialty space that Gap occupied when we had close to 1,100 stores in North America, that that space has contracted somewhat. And some of that has gone to value; some may have gone to premium.”
With closings in recent years, the Gap chain has 775 specialty stores globally. Gap’s outlet (about 500 stores) and online businesses are not underperforming.
Mr. Peck further said long delays in addressing underperformers is now hurting the potential of healthier stores. “We have stores that we have allowed to continue to age in locations that have also continued to age. And at some point those stores become toxic to the health of the business.”
The main challenge has been women’s, and that weakness impacts men’s and holds back gains in other categories.
Mr. Peck said Gap is working with landlords to minimize the impact of the closings, but warned of “financial consequences.” The closures will take place as soon as feasible. He said, “I’m going to move thoughtfully, but aggressively.”
The focus on Gap chain will shift to improved margin and expense reduction to stabilize the business.
“I do believe there is growth in this brand, but we’re not building a plan that’s predicated on growing our way out of the problem,” said Mr. Peck. “We are building a plan that’s predicated on making structural changes that bring the P&L structure more in line and deliver an improvement in profitability, and that’s what we’re committed to deliver.”
- Gap Inc. Reports Third Quarter Results – Gap
- The Gap, Inc. (GPS) CEO Art Peck on Q3 2018 Results (Earnings Call Transcript) – Seeking Alpha
- The Gap CEO Out After Struggling to Grow Profits – Fortune
- Gap looking to close hundreds of stores at malls ‘quickly and aggressively’ – CNBC
- Gap’s plan to save itself: Shrink –CNN
DISCUSSION QUESTIONS: Is Gap Inc. making the right move in closing potentially hundreds of Gap branded specialty doors to stabilize the business? What challenges does a “shrink to profitability” strategy present for retailers?