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The Gap has lost the young and hip
In a world of $130 jeans and trendy urban styles, The Gap is drowning in a sea of cheap denim and outdated khakis. As earnings head down, investors should shop elsewhere.
By Robert Walberg
The Gap's credibility gap widened even further Thursday, when the apparel retailer slashed its full-year earnings guidance by almost 10%. For long-term, long-suffering investors this is a familiar refrain, as The Gap (GPS, news, msgs) has issued numerous profit warnings over the past several years due to one merchandising misstep after another.
Though other apparel companies are apt to fall in sympathy with The Gap over the next day or two, The Gap's problems are very much its own, and not universal. Despite what the company would like you to believe, the lousy results were not a function of consumers reigning in spending due to higher oil prices. Nope, The Gap's problem is that it is no longer a destination store for shoppers.
Looking for jeans? Unless you're over 40 or unconcerned with fashion trends, my guess is that you aren't shopping at The Gap. The "in" look in denim these days runs $130 or more -- especially for women. The Gap just doesn't serve that market, and as such it is having a hard time moving its merchandise. A promotion that cut prices on jeans to below $40 and tied the sale in with music shows just how clueless management is with regard to its customer base.
A refuge from, not for, teens
One customer group that the company has struggled to win over in recent years is teen-agers. Unfortunately, this quarter's results offered little hope on that front. In fact, if you're looking to get away from all the teens hanging around the mall, The Gap is a decent place of refuge. The company's conservative styles have pushed teens to trendier stores such as American Eagle (AEOS, news, msgs), Aeropostale (ARO, news, msgs), Abercrombie & Fitch (ANF, news, msgs) and The Buckle (BKE, news, msgs). Even The Gap's Old Navy chain has failed to consistently resonate with teen shoppers.
Another problem still hanging over The Gap is the flat, tired market for khaki -- the company's big winner a decade ago. The urban stylings of bebe stores (BEBE, news, msgs), Guess? (GES, news, msgs), Kenneth Cole Productions (KCP, news, msgs) and Urban Outfitters (URBN, news, msgs) have left The Gap struggling to find a profitable niche. The Gap's Banana Republic unit tries to serve this market, but its conservative edge leaves it posting disappointing results more often than not. In the second quarter, that chain's same-store sales fell by 3%.
Frankly, after a few encouraging quarters (against very soft comparisons, mind you) it looks as though The Gap has to go back to the drawing board. Again. Management admitted as much when it noted that its summer merchandise failed to resonate with consumers, and that weak sales in August spoke poorly about how well its fall merchandise had caught on.
Cutting prices and margins
The poor performance in August is not a good sign, as the back-to-school shopping season is second only to the holidays in terms of sales. If The Gap isn't scoring with consumers now, why should any of us think that it will right its wrongs fast enough to cash in during the holidays?
For The Gap to compete and win in the teen and young-adult markets, it needs to completely change its image. But changing an image that took years to cultivate risks losing the core, the older customer who has remained loyal to The Gap throughout its many ups and downs.
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The Gap must also move away from the practice of aggressively marking down its merchandise. The policy has led consumers to wait for sales before buying. Note that margins slipped badly last quarter, as a lackluster response to merchandise selections led to yet another wave of markdowns.
Whatever its past success, The Gap is now a company known for unexciting merchandise at discounted prices. In the highly competitive retail apparel arena, that's not a recipe for success. Management pays lip service to altering its merchandising mix and adhering to more stringent pricing practices. But there's been so little evidence of either over the past several years that investors have no reason to wait for a new dawn.
To the contrary, the sun has set on this overstored, underperforming franchise, and investors are advised to take a cue from teen shoppers and just move on. The stock is poised for a near-term test of its 52-week low of $18.12. If it falls through that level, next stop: $17.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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