Gap Signals Future Gloom and Doom by Pushing Out Its Top Numbers Cruncher

Wall Street never loves it when a publicly traded company parts ways with a chief financial officer. But when a struggling apparel retailer gives its top numbers cruncher the old heave-hoe before the start of the crucial holiday shopping season, it really sends up red flags as to what could be ahead.

Gap (GPS)  on Wednesday announced that CFO Sabrina Simmons would depart in January, the end of the retailer's fiscal year. Simmons has held the top finance post since 2007, and has been with Gap dating back to 2001 when apparel design wizard and current J. Crew CEO Mickey Drexler was Gap's chief. Gap's founder, Donald Fisher, was chairman.   

"Since I assumed the CEO role two years ago, Sabrina has been an instrumental partner in helping the company transition to a new leadership team. With that period of transition behind us, Sabrina and I agreed that this was an appropriate time for a change in the organization and for her to pursue the next chapter in her career," Gap's CEO Art Peck said in a statement

Simmons' departure -- a mere weeks before the Black Friday shopping frenzy begins -- could signal several things. First, it's unlikely Gap will extract itself from a dreadful run of sales this holiday season. After all, why push out a veteran CFO if the company has the prospect of sharing great holiday numbers early next year? 

The apparel retailer's same-store sales in September fell 3%, the ninth month of slower sales out of the last 10. Wall Street was banking on a 3.6% decline. The relatively in-line sales number for Gap -- driven mostly by a 4% same-store increase at the value-oriented Old Navy chain -- masked worrying declines at the Gap and Banana Republic divisions.

Gap brand sales have declined for nine straight months, and Banana Republic sales have fallen for 19 straight months, according to the company.

Same-store sales at Banana Republic plunged 9% in September. At Gap, same-store sales nosedived 10%. 

"We think Gap's valuation proposition is no longer competitive, and two of its major brands (Gap and Banana Republic) have lost relevance with consumers. These are not easily fixable near-term, leaving us confident Gap will continue to cede share like the department stores and teen retailers," wrote Morgan Stanley analyst Kimberly Greenberger in a recent note to clients. The analyst rated Gap shares underweight, or the equivalent of a sell.

A Gap spokeswoman didn't immediately respond to a request for comment on the timing of the announcement of Simmons' departure. 

As a result of Gap's brutal sales trends and shift to online shopping that is disrupting brick-and-mortar retailers, Peck may be looking for a new chief financial officer from outside the company that could come in and find deeper cost savings than what has been articulated to Wall Street so far. And that would likely entail overseeing a bigger store closing campaign than Peck and Simmons have crafted.  

In June 2015, the company detailed plans to close a total of 175 Gap stores in North America over the next few years. At the time, Gap estimated annual savings from this tactic would be about $25 million beginning in 2016. Then in May this year, Gap said it would close its fleet of 53 Old Navy stores in Japan and more Banana Republic locations, mostly overseas. It also promised to "streamline its operating model" in a bid to further cut costs.

Gap believed the new measures would save it about $275 million in annual costs starting next year. Even considering the actions, Gap remains a sprawling global enterprise that likely needs to be further corralled to surive the future of retailing. At the end of the second quarter, Gap boasted a dizzying 3,730 store locations in 52 countries. Total square feet operated by Gap stood at a colossal 37.8 million. 

Cautioned Greenberger, "Management has outlined $275 million in expense savings in 2017 to temporarily slow its eroding profitability, which we are encouraged to see. However, the path to financial recovery rests on consistent sales growth, which investors need to see to become more constructive on Gap's long-term story."

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