Where Gap Fell Down in the First Quarter

Gap saw a drop in earnings for the first time in over two years, and management called out some of its biggest failures.

May 23, 2014 at 2:43PM

The day after Gap (NYSE:GPS) announced its April sales results, the stocked jumped 3% to $40.52. Yesterday, the company announced its first-quarter sales and the stock is currently trading at $40.84. There wasn't much surprise in the release, in other words. Comparable sales for the quarter declined 1% across the company's portfolio, with Gap and Banana Republic both turning in negative results while Old Navy put up a slight increase.

Gap stumbles in the first quarter
CEO Glenn Murphy summarized the company's position on the company's earnings call.

Everybody here was actually pretty disappointed in our earnings results for the quarter. We were below last year and that hasn't happened to us since the first quarter of 2011 and that was driven by the cotton crisis. So in spite of the fact that the operating conditions were challenging, especially in the first half of the quarter, I expect that we would do better.

Gap missed the boat this quarter and earnings fell 18% to $0.58 per share. Murphy said that the blame was all on Gap and largely on its management of inventory. Spring clothing was pushed too hard, a pile-up of excess product after February wasn't marked down aggressively enough, and Gap failed to communicate its vision to the customer in way that got them excited about buying it.

The only slightly bright spot in the quarter came from Old Navy, which managed to increase comparable sales by 1%. That small increase doesn't capture the fact that April comparable sales at Old Navy grew 18%. The brand has its act together and it's head and shoulders above Gap and Banana Republic, right now.

What to expect from Gap in 2014
Gap is planning to vastly expand Athleta over 2014, opening 35 locations to end the year with over 100 locations. Athleta had a solid quarter, with the company calling out successes that it had with "exercise as fashion" clothing. Performance gear also outperformed the rest of the store, and Gap is going to focus on those categories as the year goes on.

At Gap and Banana Republic are on the road to recovery. Banana has a new creative director in Marissa Webb, and her presence will begin to be felt closer to the end of this year. The brand has finally caught on with women, and hopefully the business will begin to see some growth in the coming months. At Gap, it's a similar story. The first quarter saw some transitions in management and hopefully things are getting better.

As an investor, it's reassuring to hear Gap address some of its shortcomings and not to sugarcoat them too much. Gap seems to have recognized it real mistakes -- not to say they won't make them again -- and has a plan to make the rest of the year better. I'll be most interested in the third-quarter results, which should show off the changes being made at the company now.

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Andrew Marder has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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