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Gap Set to Close Hundreds of Stores CEO Says Are “Dragging Down the Brand”

Gap will be the latest retailer to cut a slew of stores lacking in the performance department.

During a third quarter earnings call Tuesday, Gap Inc. CEO Art Peck said the company will start eliminating underperforming stores in a move he called “overdue.”

Starting the call on a high, Peck extolled the well-performing functions of Gap Inc., like Old Navy’s continuing strength and the revitalization of Banana Republic, but the tone quickly changed when it came to the company’s namesake brand.

Gap Global sales were down 7 percent in Q3 and earnings per share guidance for FY2018 narrowed to $2.55 to $2.60 from the previous guidance of $2.55 to $2.70. Meanwhile, sales were up 4 percent at Old Navy and up 2 percent at Banana Republic.

“We are clearly not satisfied with the performance of Gap brand,” Peck said. “We know this iconic brand is important to customers, and we are committed to taking the bold and necessary steps to ensure that it delivers value to shareholders.”

Those steps appear to include closing a portion of the 775 Gap brand specialty stores found globally, which Peck says are “dragging down the brand.”

“It includes some amazing flagship stores around the world that we are evaluating with an objective eye on which ones provide sufficient value to keep. Collectively, the flags have meaningful negative contribution,” Peck explained. “Beyond that, there are hundreds of other stores that likely don’t fit our vision for the future of Gap brand specialty store. Whether in terms of profitability, customer experience, traffic trends, importantly—the rod structure, and/or near and long-term relevance to the brand.”

Details on the locations and sequencing of the upcoming closures are yet to come, but the specifics should come as part of the forecast for FY2019. As it stands, Gap Inc. plans to continue growing its e-commerce business, which it says makes up roughly 20 percent of revenue, and the more than 500 Gap outlet stores that account for about 30 percent of total Gap Global revenue.

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The other 50 percent of revenue for Gap stores all comes from the ailing specialty store segment of Gap Global and Peck said there is a wide variance in profitability among the group, explaining that the sum total only provides a “modest contribution” to overall company performance.

Gap Inc. opened a net gain of 25 stores in 2018, with a focus on Old Navy and Athleta. Most store closures were already weighted toward Gap and Banana Republic. Net sales were $4.1 billion companywide, up 7 percent from 2017.

Peck acknowledged the frustration shareholders have toward Gap as most other brands under the Gap Inc. umbrella report growth.

“You have my commitment that, while this type of strategic action on the fleet is overdue, I am going to take action to get this one done and get this one behind us,” Peck said. “There will likely be a cash cost to exit many of these stores which will attempt to minimize with appropriate sequencing. But, I plan to exit those that do not fit the future vision quickly.”

Still, Gap Inc. acknowledged that its specialty stores remained “an important part of the customer journey” and specialty stores with “attractive four-wall economics, that operate at brand standards, that have positive trajectory and long-term relevance” will be an important part of the business going forward.