As Gap Inc. looks to improve the channel mix of its eponymous brand and shutter specialty stores, the retailer beat analysts’ earnings estimates but fell short on top-line revenues for the fourth quarter of 2018. The retailer reported revenues of $4.62 billion and earnings per share of 72 cents, compared to analysts’ estimates of $4.69 billion and 68 cents.
Gap Inc. President and CEO Art Peck said in a call with analysts that, overall, the quarter “did not live up to what I know our brands can deliver,” and that the company did not finish off the year as strongly as forecasted. While he said the macro environment played a role, he noted that the company is committed to improving in the areas of business it controls. He also said the retailer made solid progress on its goals for productivity and discipline to deliver on its guidance.
Gap Inc. saw the ongoing renewal of Banana Republic, along with continued market share gains at Old Navy and Athleta. And Peck said the company made meaningful technology investments for future growth and efficiency.
For its namesake Gap brand, Peck said the company has taken “thoughtful and decisive action to radically restructure our fleet” to address underperforming stores or those that don’t represent the best of the brand. The company plans to shutter roughly half of its specialty stores, particularly in North America, leaving it with a “smaller but healthier specialty fleet.” Following the closures, Peck said the company expects to see improvement in its channel mix: The profitable online and outlet businesses would comprise roughly two-thirds of the business, with specialty at one-third (down from about half today).
Peck said Old Navy is still a market leader in the value space, and that “2018 was a record year for the brand,” with comp growth of 3 percent. He added that the brand “continues to operate at very healthy margin rates, leading the Gap Inc. portfolio.” Peck pointed out that Old Navy had an active roster of high-volume, multi-channel customers that increased by the double digits last year. However, he noted that the brand, along with the company’s other concepts, saw a deceleration in traffic in mid-December.
When it comes to Banana Republic, Peck said 2018 was “a year of progress” overall, with the brand achieving positive comp along with 120 basis-point growth in product margin expansion last year. On the product side, the brand expanded its market share across areas such as suiting, dresses, skirts and sweaters, as the brand’s shopper base is still growing along with product acceptance. He added that reactivation and acquisition rates have improved over 2018, as the brand’s marketing has had a consistent and brand-appropriate aesthetic.
The company’s Athleta brand notched another year in market gains. The brand opened 13 brick-and-mortar locations and finished out the year with 161 stores. In addition, Peck said the entire company earned B-Corp certification – a move that is “resonating with customers and employees.” Meanwhile, the company’s active customer file grew by 20 percent. While the brand saw softness in December, Peck sees an opportunity for market share and growth this year and later.
NewCo and Old Navy
Gap Inc. plans to separate into two independent, publicly traded companies – Old Navy and a yet-to-be-named entity (“NewCo”) – which Peck said would both be “well-positioned to lead in the evolving retail landscape.” NewCo will consist of the Gap brand, Athleta, Banana Republic, Intermix and Hill City, while Old Navy will be a standalone company. NewCo, Peck said, will be able to innovate and look into new ways to serve shoppers. He added that Old Navy is one of the quickest-growing apparel retailers in the U.S., with a “winning business model” and “an impressive runway for future growth.”
Over time, Peck said the brand’s levers for value creation, business model and shoppers have diverged from the company’s specialty brands. “That divergence to me is now clear,” he said, adding that the best way for each company to grow is to pursue their strategies separately. Peck will hold the same position with NewCo following the split. Old Navy President and Chief Executive Officer Sonia Syngal will head up that brand, which was started in the 1990s “to compete with rivals that were undercutting Gap’s prices,” per The Wall Street Journal.
The challenge and opportunity for NewCo, Peck said, is to “provide truly frictionless access across stores and digital,” while continuing to take in the power of data from cross-brand shoppers and to become “radically more responsive to our customers.” At the same time, Peck said Old Navy can benefit from its wide customer awareness, scale and positioning to achieve profitable growth going forward.