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Gap Inc. ‘Leans Into Denim’ For Improved Performance in Second Half

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Following an admittedly difficult second quarter for Gap Inc., president and CEO Art Peck said, “We have a clear action plan in place” to improve the top and bottom line, each of which was down in the period.

One of those clear action plans includes a focus on expanding denim assortments at both Gap and Old Navy. Improving comparable store sales and profitability could be critical to a successful spinoff of Old Navy into an independent public company, which the company has said it is planning for next year.

“Traffic remained a challenge, which contributed to overall demand falling below expectation,” Peck told analysts on a conference call. “Our inventory levels going in combined with a competitive environment resulted in elevated promotional activity to clear through inventory once the weather turned.”

The company, according to Peck, has more work to do to position itself for “consistent delivery in this challenging retail environment,” but it is seeing “sequential improvement in the areas that will drive improved results, better product quality, acceptance, increased responsiveness, marketing effectiveness, proved productivity and an optimized store fleet.”

Increased focus on operating discipline, improved execution and measured investment in marketing and talent across all brands “is driving slow but positive momentum” that Peck said gives him confidence heading into back-to-school and holiday.

Gap Inc. will have to show continued discipline around sales, general and administrative expenses (SG&A), reducing inventory commitments, increasing store conversion and improving marketing effectiveness, Peck noted.

Old Navy

Old Navy, according to Peck, is “an exceptional business with exceptional economics…a category killer with excellent four-wall economics and a disciplined cost structure.” While comps in the second quarter were down 5 percent, the chain has grown sales and comps over the last three fiscal years and the company thinks there’s “a lot of white space for continued store expansion,” Peck said.

“We’re leading with our strengths in the back half from a product perspective, specifically leaning into denim, where we are pleased with the results; active, which is performing, and fleece, which we believe we have a lot of upside in,” Peck said, acknowledging some merchandising missteps in the first half.

But the company seems clear on how to tackle its second half.

“We’re amplifying our category strengths with focused, powerful marketing to drive brand relevance and buzz, and we’re also implementing traffic driving initiatives to bring her back into the store,” Peck added. “Most recently, we re-merchandized inside the store in terms of product placement in 50 Old Navy locations. And while we did this very recently, we’re seeing very early but positive results that we will intend to roll across the Old Navy fleet as we read the test results.”

The company’s views of the fundamental strength of the Old Navy business and brand remain strong. Old Navy’s market share position holds steady at 3.1 percent, according to Peck, and it remains the No. 2 largest apparel brand and the No. 9 largest retailer, he noted, citing NPD data.

Gap

For the Gap brand, the CEO said despite traffic challenges, “we did see all channels of the brand deliver positive sales over traffic for the quarter.” The company has made “meaningful improvements to the product engine of the brand, with tighter strategic priorities, process improvements and talent and structure changes.”

Women’s bottoms is a bellwether category, Peck noted, adding, “that’s why we’ve been so focused on accelerating denim.”

“What you will see executed in every one of our Gap stores is a proud front and center denim moment where we stand for denim and windows that support that,” he said. “And we feel like she’s getting that and she’s seeing the new fits that we have and she’s reacting to it quite well…Our tagline is ‘It’s Our Denim Now’ and we’re really trying to focus on denim for all, including inclusive sizing that allows us to reach out to a larger size customer.”

Denim has been in a bit of a flat cycle, Peck said, “which has always historically been then followed by something that really motivates the consumer to get off her couch and into the stores, and we’re seeing some of that right now in leg shape and rise certainly, but we anticipate that we’re going to see some trends emerging in the springtime that are going to play into our denim authority.”

Tariffs and pricing

Teri List-Stoll, executive vice president and chief financial officer, said Gap Inc. is closely monitoring the impending tariffs on Chinese apparel imports.

“Our teams have contingency plans in place for the back half related to the List 4 tariffs, including partnering with our vendors to share in the cost, as well as pricing actions,” List-Stoll said.

There are addition ways to mitigate prices, Peck said, such as looking at places “where we should be adjusting tickets and adjusting those either at the factory or in our DCs or in our stores. We have the capacity to do all of that.”

“By far the bigger lever is continuing to tighten up our inventories…that allows us to improve our yields and reduce our promotional intensity and recover it that way, as well,” Peck said. “Obviously, our first and foremost would be that we get into a more predictable environment where we aren’t sort of constantly being whipsawed by what’s going to happen tomorrow, but we’re very flexible and we can deal with it as it comes along.”

Gap Inc. is working on a targeted pricing strategy in certain categories “where we have pricing authority versus a broad-based increase in pricing,” List-Stoll said, adding, “The unmitigated impacts of List 4 tariffs would be an incremental 6 cent impact to our guidance based on current estimates. So, through our mitigation and contingency plans, we would expect this impact to be much slower.”

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