Not very suprisingly, Gap Inc. did not post good Q2 results and has lowered their year-end projections:
SAN FRANCISCO, Aug. 17 /PRNewswire-FirstCall/ — Gap Inc. (NYSE: GPS – News) today reported net earnings for the second quarter which ended July 29, 2006 of $128 million, or $0.15 per share on a diluted basis, compared with $272 million, or $0.30 per share, for the same period last year.
Second quarter net sales were $3.7 billion, compared with $3.7 billion for the same period last year. Comparable store sales decreased 5 percent, compared with a prior year decrease of 3 percent.
“The second quarter continued to be challenging, as we aggressively cleared inventory to prepare for fall merchandise, and we invested in marketing and stores to improve second half performance,” said Gap Inc. president and CEO Paul Pressler.
“Each brand is at a different stage in its turnaround,” continued Pressler. “We are encouraged by improved performance at Banana Republic and our online division. And while we are making progress at Gap and Old Navy, we know it will take several seasons of consistent product, marketing, and store improvements to win back our customers. We remain committed to the strategies at each of our brands and to our growth initiatives.”
(The rest of the press release is here.)
The huge markdowns they took towards the end of the season to make way for the new Fall re-launch really hit them hard. This shouldn’t be suprising. A long time ago, everyone should have realized that Q2 was going to be nasty for them.
The turnaround of the Gap brand is going to be hard, as I’ve talked about in the past (here and here). The hardest part now is going to be in remaking their image and getting customers back into the store. And so far, this has been a challenge:
That said, our sales results month-to-date are trending below our expectations. Although we are disappointed with this initial performance, we are not discouraged and are seeing some successes. Our body business is building momentum, and our kids, baby, and maternity division is tracking well.
In adult, customers are responding well to several of our key items. Most notably, our womens clean pants, clean sweaters, casual bottoms and knits. In mens, our new khaki pants, fashion cargos, graphic and short-sleeve knits are all performing well.
Denim across the board continues to be challenging, particularly our five pocket jean. Compared to last year, our fall denim buys are lower and we skewed our assortment for trend-right fashion styles in darker washes.
But they are also noting that they are very pleased with the execution in the stores (though, would they really say that they weren’t?) and that their customer service survey scores have increased at Old Navy and Gap. That is a positive sign. The key is going to be getting to each customer, one by one, winning them back, and hoping that they tell their friends about it. Increased customer service scores is a great first step and early indicator of that.
Look for the Fall 2 Update in Mens & Womens to happen at Old Navy on August 28. I am interested to see where they plan on going, fashion wise, post BTS.
Look for 100 adult Gap stores to be remodeled by the end of the year. I guess I am in an area of higher performing Gap stores, since I have three of the new concepts out of the four closest stores.
This will be an intriguing quarter to watch Gap and all of their brands. Except Old Navy and Gap proper to be the most fun to watch, while Banana Republic should continue to build on the moderate momentum that they’ve seen in the first half of 2006.
Will the young adults come back to Gap? Will the increased marketing effort pay off? How will they look in three months, as we go into the Holiday season? I wouldn’t expect a big turnaround this quarter, but I hope for their sake that they are announcing some positive sparks of light come October.
More coverage from Marketwatch and The Street.
Transcript of the conference call provided by Seeking Alpha.
