Gap (GPS -0.80%) owns a collection of brands that hit different price points, from Old Navy at the low end to Banana Republic at the high end. That balance, however, didn't help the company in 2022, which ended with a particularly weak holiday season. Here are the signs that Gap is entering 2023 on its back foot and why investors might want to wait before jumping aboard the stock even after its 38% drop from 52-week highs.
The numbers
In 2022, Gap's revenue dropped 6% year over year. The retailer's comparable store sales were off by 7%. Sales in physical stores were off by 6%, while online sales, around 38% of the top line, dropped 7%. The merchandise margin fell 430 basis points. By any stretch of the imagination, 2022 was a tough one for Gap.
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The fourth quarter was notably bad. Sales at low-end-focused Old Navy declined 6% in the final stanza of the year, with same-store sales down 7%. Mid-tier Gap suffered a 9% sales decline, with same-store sales down 4% (same-store sales in North America were even worse, down 5%). High-end Banana Republic's sales were lower by 6%, with comparable store sales off by 3%.
The best performance came from athletic wear retailer Athleta, which saw a sales decline of 1%, with same-store sales off by 5%. The reason this particular quarter is so important is that it includes the holiday shopping season, a period in which most retailers generate a larger portion of their yearly sales.
Given these results, it's little wonder that the stock has fallen so hard. But what's interesting is that much of that stock drop has occurred in 2023, basically coinciding with the company's weak fourth-quarter showing.
Bad omens
At this point, it looks like the bad news will continue into 2023. For starters, Gap is projecting a further company-level sales decline in the low- to mid-single digits. That shouldn't be shocking, given the trends at the end of 2022. However, even if the company is able to improve its margins, guidance toward even lower sales suggests that Gap is having trouble resonating with customers.
That's highlighted by the Athleta business, where the company recently parted ways with the brand's president. According to Gap, Athleta "has suffered from product acceptance challenges over the past several quarters." In other words, even as competitors like Lululemon continue to execute well (comparable store sales increased 15% in the fourth quarter), Athleta's fashion choices are causing it to fall behind.
That's not something that is likely to be quickly fixed with a new leader. The other three brand concepts aren't exactly hitting on all cylinders, either.
And the company has just announced another round of layoffs. That comes on top of layoffs announced in late 2022. The big-picture goal is to generate savings of as much as $300 million a year. That's not a bad thing, but these moves are clearly coming from a position of weakness, given the sales trends. That's not something that should inspire investor confidence.
Wait for results
When it comes to buying fashion-based products, consumers can be very fickle. And once a brand falls out of favor, it can take a long time before it regains traction. With all of Gap's brands seemingly in the doghouse right now, investors are probably better off waiting until there are clearer signs of progress before betting that a turnaround is coming.
Notably, the 2023 sales decline highlighted above includes a 53rd week (which is expected to add $150 million to the top line), which means that the outlook may really be worse than it at first appears.
