Gap Closes Japanese Stores and Hints at Broader Weakness

There are further signs of trouble in the retail sector this week, as once-great clothing chain Gap (GPS) - Get Report  said that it will close more of its Old Navy stores.

However, the location of the store closings is surprising: Japan. With the world's third-largest economy and a large millennial population, Japan should be a good fit for the fashion retailer.

Is this another sign that it is time to avoid this disappointing investment?

On Thursday, Gap said that it will close all 53 of its Old Navy locations in the country, citing tough competition from local retailers.

"I'm obviously disappointed that we're going to be discontinuing operations, but I view it as a sign of a good company when you acknowledge that the business isn't going to deliver and you make changes and move forward," said Gap's ever-optimistic Chief Executive Art Peck.

Gap will shift its focus to improving its operations in the Chinese and North American markets, the company said.

The company will still operate its 51 Banana Republic and 170 Gap stores in Japan.

Although Japan may seem like a good fit for retailers, the truth is that the country is still cash-strapped and facing deflationary pressures, despite years of stimulus and so-called Abenomics.

As Toshihiro Nagahama of the Dai-Ichi Life Research Institute told Bloomberg, "Japanese consumers, who are generally shopping experts, are increasingly in money-saving mode. Living in a long-term deflationary environment, they have a strong sense that they don't want to fail at shopping. For foreign brands, Japan is one of the hardest markets to be successful."

That means that Japanese shoppers are turning to local retailers that they think make more economic sense than imported American brands, Nagahama said.

But this retail xenophobia isn't to blame for all Gap's woes. As with many U.S. fashion-oriented retailers, including Macy's, Michael Kors and Nordstrom, Gap faces increasing headwinds as consumers turn to e-commerce outlets such as Amazon and discount retailers such as Walmart.

In fact, Gap isn't closing stores in just Japan. The retailer has announced a total of 75 store closures worldwide in an effort to save an annual $275 million.

Gap posted fiscal first-quarter earnings of 32 cents a share on revenue of $3.44 billion. This was in line with analysts' expectations, but these numbers were still down from the 56 cents a share on $3.66 billion booked a year earlier.

The company also reported a comparable-store sales decline of 5% for the quarter and declined to reaffirm its earnings outlook for this fiscal year.

Gap stock has declined by more than 55% in the past 12 months, vastly under-performing the S&P 500 as a whole, which fell 4.3% during the same time period.

Like most retail brands, Gap isn't a healthy option for investors right now. Clearly, the spending habits of people around the world are changing, leaving what had once been trendy and fashionable clothing outlets in the dust.

---

Gap and other brick-and-mortar retailers are clearly bad places investment dollars right now, and if investors are souring on stocks in general these days, it is understandable. However, there is a way to make a guaranteed $67,548 in the next 12 months. Click here for details.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.