Retail

Gap cuts profit forecast after an 'extremely challenging' quarter; shares tank 15%

Key Points
  • Gap cut its 2019 profit forecast and posted the biggest drop in same-store sales in at least three years at its Gap brand.
  • The report underscored the retailer's struggles to compete with fast-fashion retailers in the face of changing customer preferences.
  • Shares of the company, once a trendsetter with its casual logo emblazoned hoodies and khaki cargos, were down 15% in premarket trading Friday.
VIDEO0:5000:50
Gap misses on top and bottom

Gap cut its 2019 profit forecast and posted the biggest drop in same-store sales in at least three years at its Gap brand, underscoring its struggles to compete with fast-fashion retailers in the face of changing customer preferences.

Shares of the company, once a trendsetter with its casual logo emblazoned hoodies and khaki cargos, were down 15% in premarket trading on Friday.

Chief Executive Officer Art Peck called the quarter "extremely challenging" and cited unusually cold weather in February, late spring breaks, a delayed Easter and lower tax refunds as reasons for the dour performance.

Unseasonably cold weather has been a drag for most U.S. apparel retailers in the first few months of 2019, with Gap's Old Navy especially hit as most of its apparel is tailored toward warmer weather.

The Gap and Old Navy stores located in Times Square, New York.
Adam Jeffery | CNBC

However, analysts were unconvinced and felt the absence of in-fashion products was weighing on Gap brand's turnaround efforts.

"Every quarter management claims that products are improving and that the (Gap brand) is responding to changing consumer demand," said Neil Saunders, managing director of GlobalData Retail. "And yet every season, Gap churns out the same bland range of undifferentiated product which has barely changed over the past 20 years."

On a post-earnings call, Chief Financial Officer Teri List-Stoll acknowledged the lack of strong products at both Old Navy and Gap in the first quarter and said the company had held back on marketing until designs and assortments improved.

Sales at established Gap brand stores fell 10% in the three months ended May 4, steeper than the 4% decline analysts had estimated.

Peck replaced Gap brand's head last year and hired a new marketing chief, in efforts to turn around the unit with more appealing products, shorter response times in bringing designs from sketchpad to stores and better advertising.

But those efforts are yet to succeed. Quarterly same-store sales at the brand have risen only once since the start of 2016, according to Refinitiv data.

Adding to the worries, Old Navy, a bright spot for the company in recent years and which is being separated as a publicly listed company, reported a surprise drop in same-store sales.

Peck said he remained confident in Gap's plan to separate into two independently companies in 2020 and had hired a dedicated team to manage the separation.

Overall same-store sales fell 4%, bigger than the 1.2% drop analysts had expected.

The San Francisco-based company cut its 2019 adjusted earnings forecast to $2.05 to $2.15 per share, from a previous range of $2.40 to $2.55.

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