The near single-minded focus Gap (GPS -5.51%) has placed on the Old Navy brand looks to be paying off. The retailer in mid-November reported its fourth consecutive quarter of higher same-store sales and even managed to post higher comps at its namesake chain.
Gap expects Old Navy to reach $10 billion in sales over the next few years, and it remains the largest contributor of revenue to Gap, accounting for nearly half of the recent quarterly total of $3.8 billion.
Image source: Getty Images.
Closing the gap
Gap has made a concerted effort to downplay both the Gap brand and its upscale Banana Republic in favor of the more down-market Old Navy and to a lesser degree its women's athletic clothing brand, Athleta, as it tries to capture continued interest in the athleisure space. It previously announced plans to close over 200 underperforming Gap and Banana Republic stores while opening some 270 Old Navy and Athleta locations.
Yet while the Gap brand did gain in the most recently reported period, with comparable sales rising 1%, it also had a relatively low hurdle to get over. Last year comps were down 8% for the quarter (4% if you exclude sales due to a fire at a distribution center) and it hasn't had a single quarter of positive same-store sales since the end of 2013.
That it was able to finally climb into the black is a positive development, but maybe not as significant as it otherwise appears.
Data source: Gap. Chart by author.
I dream of jean-ie
And it could be benefiting from changing consumer tastes. Numerous fashion analysts say there's a preference for denim gaining momentum, and it's coming at the expense of the athleisure market. While Lululemon Athletica (NASDAQ: LULU) is holding its own against the downward trend, others are slipping hard. Under Armour (NYSE: UA) for instance, suffered a 12% decline in North American sales in the most recent quarter because of changing preferences, and Dick's Sporting Goods (NYSE: DKS) had to close its two Chelsea Collection athleisure boutiques.
Retail technology specialist Edited says sales of denim jeans for women surged 79% over the first six months of 2017 compared to the year-ago period, so Gap could be getting some of the tailwind from the trend.
It's certainly helping Old Navy continue its streak, as it has become the fourth-largest denim retailer, a two-spot climb from where it stood last year, as comps on denim were up in the mid-teens.
A fading brand
As for the Banana Republic brand, there doesn't seem to be as much potential. Like the Gap brand, Banana Republic had sunk so far that posting better results for the period would have been easy. Last year, comps were down 6% for the quarter, even when accounting for the fire, and they were off 12% in the year prior to that. But despite having sunk to such depths, Banana Republic wasn't even able to break even on comps let alone turn positive.
Even on the conference call with analysts, CEO Art Peck didn't sound exactly upbeat when discussing the brand's prospects, noting it was relying upon the "pillar" of its classic clothing lines in hopes of translating that into customer loyalty to keep it functioning.
With nearly 600 stores, Gap clearly isn't thinking about killing off the Banana Republic brand, or even moving it to an online-only model as several retailers have done, but it might not be a bad strategy to consider.
A confluence of events
Right now, Gap seems to have been saved by adopting a focus on its discount chain, which continues to resonate with shoppers still visiting bricks-and-mortar stores, and also catching a boost from changing consumer tastes. It's also benefiting from having been down for so many years, that any upward movement gets magnified.
That leaves it open still to future fickleness and indicates the retailer needs to bear down even harder on shedding as many stores as possible that are not aligned with that strategy.
Gap is doing much better than many analyst imagined, but a quarter doesn't make a trend and the retailer will need to post at least another period or two of similar gains to prove this wasn't a fluke.
