Gap's Stock Is Crashing Because It's Clueless on How Holidays Will Pan Out

Updated to include comments by Gap's CFO.

Gap (GPS)  executives sound nervous about how the holiday season will pan out.

"Industry traffic continues to be challenging in November," outgoing Gap Chief Financial Officer Sabrina Simmons told analysts on a conference call Thursday. "We will invest meaningfully in marketing [as a result], but we are not expecting an immediate payback from these investments," added Simmons, who characterized the challenges getting people into mall-based Gap stores as "stubborn." Shares of Gap tumbled as much as 5% in after-hours trading on Simmons' comments.  

Gap certainly has good reason to be cautious on the holiday season. 

The apparel retailer reported that third quarter net sales fell 2% from the prior year to $3.8 billion. Earnings, adjusted for one-time items, came in at 60 cents a share, in line with analyst projections. 

Same-store sales were pressured at two out of three of Gap's divisions in the fall as the company struggled with its styles and fits. Gap's namesake brand saw same-store sales plunge 8%, worse than a 4% drop a year ago. The quarter ended with a resounding thud for the Gap brand: a 7% same-store sales decline, marking an alarming 10 straight months of declines. Meanwhile, Banana Republic also clocked in with an 8% sales decline, not too far removed from a 12% nosedive last year.

Similar to Gap, Banana Republic ended the third quarter with little momentum: a 4% sales decline that represented a dizzying 20 straight months of decreases. 

The lone winner from the quarter was the value-oriented Old Navy, where sales increased 3%. 

Gap also said it would close more stores this year than originally planned (65 compared with 50). The announcement likely sparked fear among investors of a wider store closing store campaign in 2017. 

"Although [sales] trends are clearly a positive step and we have believed the setup would take shares higher in the near term, we see long-term pressures persisting, and remain at a neutral rating as we continue to wonder if the business is still too large within the new norm of retail," wrote Nomura analyst Simeon Siegel recently.

The company reaffirmed its full-year adjusted earnings outlook of $1.87 to $1.92 a share. 

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