Gap's same-store sales topped analysts' expectations in June, reversing a 14-month stretch of declines with a 2 percent rise and giving a strong boost to its shares, which popped 5 percent.
But while that number suggests things are getting better, a deeper issue is lurking at the purveyor of classic American fashions — one that can't be explained away by unseasonable weather, ill-fitting clothes or any of the other excuses it's floated past investors over the past several months. Its initial prices — the ones shoppers see when they flip over an item's price tag — remain too high.
CEO Art Peck addressed this structural concern with investors in May, saying the starting prices on its merchandise are "absolutely" something the company has been looking at. In some cases, changes have been made, Peck said. Yet the problem isn't as simple as slapping a new dollar amount on the items. Because such a sweeping shift would require a massive overhaul to the company's supply chain, it's something that could take years to correct, Credit Suisse analyst Christian Buss told CNBC.
And that's if Gap makes it a priority. One of Buss' broader concerns about the company's elusive turnaround is that under Peck's leadership, it has spoken more about designing stylish product than fundamental issues with its supply chain, he said. Namely, it is operating on a dated retail model that its lower-priced fast-fashion competitors have left behind, Buss said.
Retailers have historically placed big bets on designs a year before they hit stores, and marked those pieces up to allow for price reductions every few weeks. This method has allowed them to move through less-popular merchandise while keeping up their margins. But what companies including H&M and Zara have figured out is that if they cut that time down to three to six months, they can "mitigate that risk dramatically," Buss said. That means they don't have to price their items at the same initial markup as traditional players like Gap.
"The end result is that they undercut people like Gap," Buss said.
For Peck, a turnaround needs to come fast. Since he took the reins at Gap in February 2015, the company's stock price has slumped roughly 45 percent, and is now trading near $23.