First-quarter net income at Gap dropped 26% to $178 million, or $0.22 per share. Sales increased 3.4% to $3.56 billion, although same-store sales dropped by 4% (compared to a 9% decrease in comps this time last year). Old Navy experienced the most serious drop, down 5% (versus an 11% fall last year) and Gap North America also suffered, down 4% (versus an 8% decrease last year). Margins also fell as the company had excess inventory that had to be marked down, particularly at the Gap brand, which the company said should be rectified by the fall.
It's long been clear that Gap is still working to get itself back on track now that Robert Fisher has temporarily taken the reins from departed CEO Paul Pressler. (The search for a new CEO is ongoing.) In Gap's press release, Fisher said that while the company has made progress, there's still work to be done, which is, of course, what most investors probably expected.
Fisher has made it clear that management is trying to simplify the company so that it can be nimble and cost-effective, but that may be easier said than done. In the conference call, talk of giving the brands more autonomy instead of centralized power at the corporate level sounds like a good start. After all, many retailers are currently using fast fashion techniques to get the hottest merchandise into their stores at ever faster rates.
These aren't new ideas, but here's one fresh piece of information: Gap is, as previously indicated, ditching the 18- to 34-year-old demographic, which is too broad. Fisher now says Gap will concentrate on the 24- to 34-year-old age bracket, with late 20s being its "sweet spot." True, Gap needed to stop trying to be all things to all people, and the teen retail market is definitely glutted with stores kids find fresh and exciting; consider Abercrombie & Fitch
On the other hand, the late 20s market might be a bit fuzzy but I'm not sure it's underserved; I suspect the younger end of this demographic still skews too young for Gap. I've always assumed that that age group's shopping tastes have a great deal of overlap with the companies that do cater to younger people. While Gap's decision to identify its focus is a good thing, it may be misjudging. Despite the fact that it decided to shutter its Forth & Towne concept for more mature women, I would have thought Gap might have decided to court the people who made the retailer a sensation to begin with -- probably 30- to 45-year-olds and maybe a bit older.
Gap's brand has suffered damage over the last couple of years, and I don't think it's going to be an easy fix. As much as investors might have taken consolation that there was no new bad news in the quarter, it seems investors will have to exert ever more patience as Gap continues on its road to recovery.
- Check out Rich Smith's Foolish Forecast for Gap.
- Revisit last quarter for Gap.
- Last December, we reviewed Gap's painful 2006.