Positive same-store sales might become a distant memory at
as the company's three divisions -- especially its Banana Republic unit -- struggle with inventory issues.
On Thursday, the Banana Republic division, known for its classy shirts and pants made from stretchy material, posted a huge drop in July same-store sales that were nowhere near the First Call consensus. Similarly, the company's overall same-store sales fell 5% and missed the consensus for a 0.8% increase.
Now analysts are worried that second-quarter company earnings could come in weaker than expected. As a result, shares of Gap closed Thursday down $1.59, or 7.4%, at $19.79.
In the company's other divisions, domestic Gap stores had a 3% decline in July same-store sales vs. the consensus for a 0.7% increase, and Old Navy stores had a 2% decline in same-store sales, missing the consensus expectations for growth of 1.2%.
However, Banana stuck out with a 10% drop, compared with expectations for an 8.1% gain. The division had posted positive same-store sales in each month of the last year, except one.
At Banana, "significantly higher average unit retail was offset by lower conversions and decreased units per transaction," the company said on a recorded call. "Year-over-year comparable-store traffic fell 3% vs. an 8% increase in June."
The results at Banana surprised many analysts, but only to a point. "It has more to do with inventory levels at Banana than anything else. They were starved of inventory. ... There's nothing wrong with cutting back as long as you're more efficient," said one analyst who preferred not to be named.
The crux of the matter, the analyst said, is that the company didn't feel it had enough inventory to run an effective sale in July, thus sealing in the month's weak same-store sales results. The company did say on the call that it shortened its summer-sale event and reduced promotional activity from a year ago.
In a statement detailing its July same-store sales, the company said the soft customer traffic trends it saw during June continued into July at all three of its divisions. Total sales in the month dropped 3% to $1 billion.
In addition, "they've been increasing full-price sellthrough for almost two years now. That you can only do for so long. ... Eventually that stops, and you can't increase comps that way," the analyst said. "To me, it smacks of more competition in the space, and they're unable to drive traffic. A small part of it may have to do with
weak mall traffic overall."
Of course, part of the weak same-store sales results can be blamed on tough comparisons each division had from July 2003. Same-stores sales at the company overall in July 2003 were up 9%; Banana Republic posted a 5% gain, Old Navy had a 9% rise, and domestic Gap stores had a 13% increase.
"Due to markdowns needed to clear summer product, total company merchandise margins in July were slightly below last year," the company said. "However, we expect to report a solid year-over-year gain in merchandise margins for the second quarter." The company reports quarterly earnings on Aug. 19.
Those results, combined with a consumers who have
slowed their consumption habits, have analysts concerned that the second-quarter earnings at the retailer might be weaker than expected. Indeed, Gap lowered its earnings expectation to 19 cents to 21 cents a share, including 4 cents a share from premiums paid on early retirement of debt.
Adding back the expenses, the outlook would be for 23 cents to 25 cents a share, vs. the First Call consensus for 28 cents a share.
"Banana Republic has been a solid and reliable source of pretax profits thanks to their high price point, big margins and strong sales," said Richard Hastings, retail sector analyst at Bernard Sands. "But higher prices today could be turning into a point of resistance among some shoppers, and we will be watching Banana Republic's monthly sales trend carefully for the next few months."
However, one analyst still believes in the company. "Gap's strategy is working and remains intact," said Buckingham Research analyst Barbara Wyckoff. "Improved flow and product assortments should result in continued improvement in merchandise margins, continuing the trend of the previous two years. Tight inventory levels should minimize the earnings risk in the event of a fashion miss."