With Clothes Piling Up, Gap Leans on Heavy Discounts to Clear Stores

By Maria Armental 

Gap Inc. executives said they had to resort to heavy discounting to move unsold clothes that had piled up at stores, moves that weighed on profit in the first quarter and could carry over into the current period.

"If you have too much inventory or the wrong inventory, holding on to it does not make it better," Chief Executive Art Peck said on a conference call Thursday. "And so we were very decisive on that and took those actions. It wasn't without pain, but we believe it was absolutely the right thing to do to continue to clean up the business and position it for better performance."

Executives blamed operational issues that delayed the timing of new items and disrupting the assortment of products, but said the weak demand wasn't the result of customers disliking the company's styles or fashions.

"We felt good across the whole portfolio that we actually had strong product that was on trend and properly assorted," Mr. Peck said.

The company reported Thursday that overall sales at established stores rose 1% in the quarter ended May 5, as a 4% decline at its namesake Gap brand offset gains at its Old Navy and Banana Republic chains.

Shares of Gap fell 8% to $30.30 in after hours trading, after ending the day at $32.95.

The Gap brand has been pressured by shift to online shopping and struggled to recapture the magic of its 1990s glory days. Wardrobe basics have evolved since its heyday, with many customers swapping out denim for yoga pants. In recent years, Gap has lost market share to fast-fashion rivals such as H&M and Zara. Old Navy, the company's budget brand and biggest division by sales, has been a bright spot.

The San Francisco-based company has been shifting its footprint accordingly. Last year, it set plans to close about 200 Banana Republic and Gap stores over the next three years, while opening new Old Navy and Athleta locations. In February, the company replaced the head of its Gap brand.

It ended the quarter with more than 3,600 stores, a net increase of 23 stores.

Chief Financial Officer Teri List-Stoll said Thursday that the operational overhaul of the Gap brand, while expected to be positive in the long run, led to some operational missteps for the spring and summer season.

"While we are heavier on inventory at Gap Brand than we would have liked, over all, we feel good about where we ended the quarter for the company, " Ms. List-Stoll said in the call.

Executives reiterated their financial targets for the full fiscal year.

Over all, the company reported quarterly profit rose 15% to $164 million, or 42 cents a share, while revenue rose 10% to $3.78 billion.

Gross profit margin was 37.7% down from 37.9% a year earlier. Excluding the impact from the adoption of a revenue accounting standard that went into effect this year, gross margin narrowed to 36.7%, largely due to the Gap brand, the company said.

Write to Maria Armental at [e-mail]

(END) Dow Jones Newswires

May 24, 2018 19:30 ET (23:30 GMT)

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