Old Navy saves face in Gap results

Gap has reported a third consecutive quarter of positive comparable sales and management is keen to emphasise that its various investments and plans are starting to pay off.

But while the company has made some progress, we are less confident Gap is firmly in recovery mode. The improvements are very imbalanced, with Old Navy underpinning all of the growth. As much as this stabilises the group, it masks underlying problems at other brands.

Old Navy remains the undoubted star of the show. This quarter, comparable sales rose by 5 per cent on a global basis, and total sales in the US increased by 7.4 per cent. That said, the US figures come off the back of a very soft comparative from the prior year when Old Navy’s revenue was flat. Even so, summer collections were strong and resonated with the family consumer, while selective discounting and deals helped to drive volumes. In the digital space, improvements to the mobile app also helped to stimulate online sales, especially among younger consumers.

Although growth could soften at Old Navy as it starts to come up against tougher comparatives, we remain broadly confident about the brand. We are also encouraged by the fact the company is testing a new smaller 8000 sqft format, which could help Old Navy to expand into locations that would not support a larger footplate.

Away from Old Navy, the Gap brand continues to show signs of improvement with just a 1 per cent decline in comparables this quarter. The overall and US total sales numbers look worse, thanks to the ongoing program of store closures. However, those same store closures mean that underperforming shops have come out of the mix, which has flattered results. In this context, while a 1 per cent decline is not bad, neither is it a strong result that suggests Gap is truly back on track.

“A dull brand, relying on discounting”

We recognise that steps have been taken to improve Gap’s ranges and make marketing more compelling. We also applaud the continued progress in areas like activewear. However, the general impression is still that of a rather dull brand that relies on excessive discounting to sell bland merchandise. From our consumer data, it is clear that most shoppers have a similar perception. In essence, much more work is needed to revive the Gap brand.

If Gap is making some limited advancement, Banana Republic remains firmly on the back foot. The brand’s 5 per cent comparable sales dip this quarter is less bad than recent history, but it comes off the back of a 9 per cent decline in the prior year so still represents a significant deterioration. The same argument about store closures that applies to Gap is also pertinent for Banana Republic.

The brand does have new leadership in the form of Mark Breitbard (who was previously CEO of Gymboree), and it is only fair to give him and his team some time to sort out the longstanding issues. However, we see little progress to-date, with collections in stores still off-pitch and overpriced.

The recent hiring of new style ambassadors in the form of quarterback Matt Ryan, the Yankee’s Didi Gregorius, and NBA’s CJ McCollum is an interesting move that will no doubt help to raise the profile of Banana Republic in menswear. However, we do not believe this will have much impact unless the brand finds a cohesive and relevant brand identity. Ultimately, success comes down to having products people want and are prepared to pay for and, on this front, we still find Banana Republic wanting.

To be fair, Banana Republic is now at least trying some new things. The introduction of the new Rapid Movement Chino, designed with comfort, fit and wearability in mind, is innovative. However, the execution in stores is poor, and at $98, the price point is high. As such, the move seems like a ‘roll of the dice’ rather than part of a carefully executed strategy to shift brand perceptions.

Looking ahead, we are more confident about Gap now than we were a year ago. However, we remain skeptical that management has the proper strategies in place to bring about a strong revival across the whole business.


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