Gap Starts to Look Like Sears

Gap Inc. (NYSE: GPS) has torn itself apart, one piece at a time, for years. The latest move involves firing 500 people in its corporate operation. It already has gone through a series of store closings. Its largest division is falling apart. Recently, a co-marketing deal with Kanye West was dissolved. (It is hard to say that this would have changed the retailer’s fortunes.)

Gap’s stock has collapsed along with its prospects. It has declined 67% in the past five years, while the S&P 500 has risen 56%. A picture of the shares paints a worse problem short term. Shares have dropped 61% in a year, compared to the broader market’s 10% drop.

Gap’s most recent disaster came with its earnings release. It said it could no longer produce a full-year forecast. This was out of step with most large retailers, which have given guidance even though it has been ugly.

Gap does not even have a real chief executive officer. Bob Martin, executive board chair and interim CEO, tried to pump up some optimism when the latest earnings were released: “We are taking actions to better optimize profitability and cash flow in the near term, reducing operating costs as well as impairing unproductive inventory.” Investors have spoken. They do not believe it.

Gap reported that same-store sales in the most recent quarter dropped 10% and revenue fell 8% to $3.86 billion. The company lost $49 million. Cash and cash equivalents on the balance sheet were only $708 million.

Gap’s most immediate problem is that its largest business, Old Navy, is in substantial trouble. Its revenue dropped 13% to $2.1 billion. Same-store sales plunged 15%.

Overall, Gap has begun to look like Sears and Kmart as they slid into a shell. What had once been among the nation’s largest retailers cut and cut, in the hope that there would be profitability in lower expenses. The problem became that revenue dropped faster.

Gap’s huge near-term test is how it performs in what is expected to be a tough holiday season for most retailers. When retailers face challenges, they often cut prices. That puts Gap in a vise.

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