May 25, 2022

StrategisChhr

Skillful Business Crafters

Gap issues another dire warning as Old Navy CEO exits

This post has been updated to reflect where prices settled after Friday’s market close.

Gap (GPS) is like one of its $39.99 logo hoodies worn for a sweaty run on a Peloton treadmill in that they are both stinking up the joint.

The long struggling apparel retailer, which is coming off two disastrous quarters and a nearly 65% stock drop over the last year, served up its next falling knife for investors late Thursday.

Gap updated its first quarter sales guidance to a decline of low- to mid-teens percentage from a prior outlook for a mid- to high-single digit drop. (Oddly, the company didn’t update its full year adjusted profit guidance of $1.85-$2.05 per share.)

Gap stock tanked 18% in trading on Friday.

The warning occurs amid a brutal quarter for Old Navy, a three-month period so bad that CEO and long-time company exec Nancy Green was sent packing this week. The company is actively searching for a new replacement to rejuvenate a chain that has long carried the financial weight for the overall business.

“These are cautionary signs in our view, as slowing top-line momentum and Old Navy execution challenges are concerning,” Jefferies analyst Cory Tarlowe said.

Signage for a GAP store stands near the entrance to a store in Times Square, March 1, 2019 in New York City. (Photo by Drew Angerer/Getty Images)

The financial fumble from Gap and Green’s departure is yet another example of the poor execution that has been ingrained into the company’s DNA the past decade. And in this case, pros tell Yahoo Finance, the stumble reflects a major miscalculation by management with Old Navy’s new “Bodequality” initiative.

The Bodequality initiative, launched at Old Navy on August 20, 2021, focused on offering every one of its women’s styles in every size, with no price difference. That includes sizes 0-30 and XS-4X for all women’s styles. Old Navy said at the time of the program’s debut it sought to “democratize the shopping experience for women of all sizes.”

No doubt a very worthy initiative by a company of Gap’s size and stature. But what the company likely didn’t plan for, experts tell Yahoo Finance, are two factors.

First is that carrying every size came with outsized margin risk. If those extra clothes at an array of different sizes didn’t sell, they would have to be marked down aggressively.

NEW YORK, NEW YORK - AUGUST 24: Old Navy BODEQUALITY Campaign in NYC on August 24, 2021 in New York City. (Photo by Dia Dipasupil/Getty Images for Old Navy)

NEW YORK, NEW YORK – AUGUST 24: Old Navy BODEQUALITY Campaign in NYC on August 24, 2021 in New York City. (Photo by Dia Dipasupil/Getty Images for Old Navy)

Second, pros say Old Navy probably has focused too much on the Bodequality initiative instead of staying plugged into having the right styles on the sales floor and online for shoppers.

“The Bodequality caused them to have to reallocate square footage and SKU [stock keeping unit] reduction to offer all sizes in every SKU and that created a massive reduction in inventory productivity,” one retail insider told Yahoo Finance. “This issue will take the rest of the year to course correct, especially if they already committed to back-to-school with more aggressive inventory buys due to supply chain backup.”

Best case scenario, Gap is able to work through the excess inventory at Old Navy and give a true earnings picture to investors come May 26.

But all things considered, Gap’s earnings are likely to be just like that $39.99 logo hoodie after a workout.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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https://finance.yahoo.com/news/gap-warning-old-navys-ceo-exits-112133465.html