Gap Inc. Reports Third-Quarter Earnings Results

During its third-quarter earnings results, Gap Inc. said it expects its same-store sales for the year to be flat or up slightly as some brands are thriving and others aren’t.

Overall for the quarter, Gap Inc. had net sales of $4.1 billion, an increase of 7 percent over last year. Net income was $266 million compared with $229 million last year.

But Gap brand’s global revenues for the period were lackluster, totaling $1.28 billion compared with $1.3 billion during the same period last year.

Executives said the Gap brand has been a particular drag on the San Francisco company’s revenues as its same-store sales declined 7 percent during the third quarter compared to last year. In comparison, Old Navy was doing well with comparable-store sales up 4 percent, and Banana Republic was seeing a 2 percent increase in comparable-store sales in the third quarter over last year.

“Clearly we are disappointed [with Gap] and we need to do better,” said Art Peck, the company’s president and chief executive.

In February, Jeff Kirwan, president and chief executive of the Gap brand, stepped down after taking over that job in late 2014. In June, he was replaced with Neil Fiske, from Australian clothing brand Billabong, where he was CEO of Billabong International.

During the third quarter, Peck said the company was forced to make some drastic cuts in its Gap-brand inventory, particularly in tops. Traditionally there are three times as many tops to every bottom, but that ratio was cut by half. “That impacted our conversion rate, driving us to sharply discount items to clear inventory,” he said. “I know we now have the benefit of hindsight, and the decision we made was the best financial decision.”

Peck said that in the fourth quarter, the ratio for tops at Gap stores will move from 1.7 tops for each bottom to 2.8 tops per bottom.

The company will be cutting back its fleet of Gap stores as it examines the productivity of each one. “There is a healthy and growing Gap online business, which is 22 percent of revenue. There is a profitable business in outlets, with 500 stores globally, which is 30 percent of revenue,” he said.

But there are a number of Gap specialty stores that are not doing well. “There will be a cash cost to exit some of these stores, but I plan to exit those that do not fit the future vision of our company quickly,” Peck said.

Old Navy, the company’s bargain-basement line of stores, was the company’s star. Its revenues during the third quarter were up 11 percent to $1.95 billion globally. “In women’s dresses and woven tops, we saw some softness driven by fabrication and choice of prints, which the team recognized,” Peck said. “But we continue to be pleased with Old Navy’s consistency and positive results.”

Banana Republic, the chain that caters to a more contemporary crowd, has been slowly making a comeback. In the third quarter, its global sales totaled $601 million compared with $557 million last year.

During the third quarter, Gap Inc. opened 86 stores and closed 24, ending up with 3,688 stores around the world.