Gap’s Plan to Return to Growth: Close Stores

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The Gap Inc. (NYSE: GPS) reported first-quarter 2016 results after markets closed Thursday. For the quarter, the clothing retailer reported diluted earnings per share (EPS) of $0.32 on revenues of $3.44 billion. In the same period a year ago, the company reported EPS of $0.56 on revenues of $3.66 billion. First-quarter results compare to the Thomson Reuters consensus estimates for EPS of $0.32 and $3.51 billion in revenues.

Same-store sales fell 5% in the first quarter, compared with a drop of 4% in the same period a year ago. By global division, Gap same-store sales were down 3% compared with a drop of 10% in the year-ago quarter; Banana Republic same-store sales fell 11% compared with a drop of 8% a year ago; and Old Navy comparable-store sales tumbled 6% this year compared with a gain of 3% last year.

The company said it close all 53 of its Old Navy stores in Japan and “select dilutive Banana Republic stores” primarily outside North America in 2016. All told Gap expects to close about 75 stores.

Combined with a streamlined operating model the company figures it will save $275 pre-tax and improve operating margin by 2% annually. In 2016, store closures and restructuring costs will likely cost Gap $250 million and about $300 million ($200 million in cash), respectively.

CEO Art Peck said:

As the pace of change across the apparel industry increases, now is the time to accelerate our transformation by scaling our product and operating capabilities across our global portfolio. By taking every opportunity to exploit our strategic advantages, our brands will be able to more fully harness the power of the enterprise to better serve their customers across channels and geographies.

Between last week and this, Gap did not do any worse than it had predicted and it offered up a bunch of store closings to boost cost savings. The store closures will certainly help, but Gap’s compass has been out of adjustment for a long time now, and something other than cost cutting is going to be needed to get the company back on a growth path.

Shares are trading up about 3% in the after-hours market at $17.80 in a 52-week range of $17.00 to $39.59. The low was posted earlier Thursday. The consensus target price for the shares was $21.07 before today’s report.