The consensus on Wall Street about Gap (GPS) is crystal clear headed into the apparel retailer’s second quarter earnings release Thursday.
Expect more top and bottom line dread, mostly because the namesake Gap brand continues to struggle getting people interested in what’s on the racks (despite an ongoing barrage of sales).
“Gap is losing relevancy,” veteran retail analyst Janet Kloppenburg of JJK Research said on Yahoo Finance’s The First Trade. Kloppenburg expects the retailer to post another quarter of declining same-store sales at its Gap brand and thinks those weak trends will persist into the current quarter.
Others on the Street agree, despite the looming separation of value-based Old Navy sometime in 2020. Under normal circumstances, breaking up a business to unlock value is often viewed favorably by Wall Street.
“On balance, we continue to see a negative risk/reward for GPS shares. While we do see some scope for Old Navy to grow revenues at an LSD-MSD rate through market expansion (store rollout/international) and modest comp expansion in the out-years, we believe underlying challenges at the core Gap brand and ongoing traffic headwinds to mall-based specialty retail will outweigh any potential benefit from the pending spin off of the Old Navy business,” Goldman Sachs analyst Alexandra Walvis wrote in a note ahead of Gap’s earnings release.
Gap at a crossroads
Gap’s stock has plunged 35% over the past year. The five-year decline for the stock is an alarming 64%. But all of it’s deserved, and then some.
Gap’s global same-store sales tanked 5% in 2018, continuing a stretch of annual declines. The 5% same-store sales drop was worse than the 1% decline seen in 2017. The retailer’s first quarter performance was also hard on the eyes.
On the heels of that disappointing holiday season, Gap said in late February it would shutter 230 Gap brand stores. Gap has closed hundreds of stores globally over the past five years, yet the brand scarcity that it has created in markets hasn’t translated to improved sales.
In effect, the closings have pushed the brand further back in the recesses of shopper’s minds. Shoppers now go into a mall, reminisce about the Gap as they walk by a former location, and buy clothing at H&M, American Eagle or any of the remaining department stores.
To Kloppenburg’s point, Gap has become irrelevant.
To try and unlock value though, Gap added in late February it would split up into two public companies sometime in 2020. Old Navy will be spun off into its own public company.
Old Navy runs more than 1,100 stores in North America (its largest market) and Asia. The brand hauled in $7.8 billion in sales last year, up from $7.3 billion in 2017.
Meanwhile, the remaining businesses named NewCo — Gap, Intermix, Athleta, Banana Republic — will live as its own separate entity. According to a slide deck from Gap, these brands raked in $8.7 billion in sales last year.
But it will likely be hard to drum up interest in NewCo in large part because of the ongoing decay of the Gap brand.
Old Navy could receive a good bit of investor interest, however, on hope it will successfully expand overseas and boost its online presence.
But until the separation, it’s likely look out below for Gap’s long struggling stock.