What: Shares of apparel retailer Gap(NYSE: GPS) slumped on Friday following the company's March sales report. Comparable sales tumbled at each of the company's three major brands, while inventory levels remained elevated. At 10:30 a.m. ET, the stock was down about 12.5%.
So what: Gap's total revenue for the five-week period ending on April 2 fell 6.5% year over year, a steeper decline than the 3.3% drop the company reported for February. Comparable sales at Gap, Banana Republic, and Old Navy fell 3%, 14%, and 6%, respectively. Old Navy has been an area of strength for the company, with 14% comparable sales growth during the prior-year period, but that appears to no longer be the case.
In addition to reporting abysmal sales numbers, Gap warned investors that it is entering April with more inventory than planned, a situation that will pressure its gross margin for the first quarter. Heavy markdowns may be necessary to clear the merchandise, creating the potential for a steep earnings decline.
GAP CFO Sabrina Simmons had little to add: "While March proved challenging, we remain focused on taking the necessary steps to improve results across the portfolio throughout the year."
Now what: Gap is struggling to adapt as its brands lose relevance with its core customers, but there have been operational issues as well. CEO Art Peck admitted to quality issues during the company's fourth-quarter conference call. "So we just had huge quality misses. Literally places where whether it was fits or the quality of the fabrication, it made the product very difficult to wear. I think I've cited this before but blazers in Banana Republic women's assortment where it was extremely difficult for the average woman to actually get her arm into the armhole. So if you just take those out and you get back to common sense quality that our customers expect, that is going to register with our customers."
These quality issues are fixable, but it will take time as excess inventory is worked through. Gap stock is down about 42% since the beginning of 2015, driven by these sales declines, and investors don't appear optimistic that the company can turn itself around.
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Shoppers visit the newly opened bookstore at a shopping mall in Kuala Lumpur, Malaysia, Tuesday, April 19, 2005. U.S. bookshop chain Borders opened its largest 60,000-square-foot (5,574-square-meter) store at Kuala Lumpur's Berjaya Times Square shopping mall carries more than 200,000 books, movies and music titles with publications available in English, Chinese, and the Malay languages in the world in Malaysia Tuesday, saying the multiracial country was chosen because of its diverse culture. (AP Photo/Andy Wong)
Juan Carlos Gonzales of Miami, carries his early morning Christmas purchases out into an empty mall, from a KB Toys Store in Miami, Friday Nov. 26, 2004. The store opened at 5 am for it's one day sale, the rest of the mall opens at 7:30 AM. (AP Photo/Hillery Smith Shay)
Store closing and sale signs share the marquee at a Linens 'n Things store scheduled to close in Pasadena, Calif., Saturday, May 31, 2008. Employees at a dozen Linens 'n Things stores in Los Angeles, Ventura and Orange counties today began a going-out-of-business sale, as the chain shutters 150 of its 500 stores nationwide. (AP Photo/Reed Saxon)
The Sam Goody music store fills up with holiday shoppers Thursday, Dec. 7, 2000, at the Mall of America in Bloomington, Minn. Best Buy Co. announced Thursday that it will purchase Musicland Stores Corp. for about $425 million in a deal which will give them 1300 additional retail outlets including Sam Goody, Suncoast, Media Play and On Cue. Best Buy also announced it will expand into Canada with 65 stores over three years starting in 2002. (AP Photo/Dawn Villella)
In this Feb. 9, 2004 file photo, a pedestrian walks through the parking lot of Tower Records in Los Angeles. LA music fans are singing the blues after the West Hollywood City Council voted to deny landmark status for the Sunset Strip building that formerly housed the flagship Tower Records store. (AP Photo/Ric Francis, File)
Prompted by an industry wide drop in personal computer earnings, retailer CompUSA announced an expansion of its product line Thursday, June 24, 1999 to encompass more high-technology equipment and software. CompUSA, which operates 211 stores in 79 cities, announced that it will close four stores soon and was considering closing as many as 10 others. It currently employs about 21,000 people. The stores will delve into selling equipment and software for other entertainment formats, like DVD movies, MP3 Internet music distribution technology, as well as digital cameras and camcorders. (AP Photo/Donna McWilliam)
Customers move in and out of a Nobody Beats The Wiz electronics store on Fifth Avenue, Wednesday, Dec. 17, 1997, in New York. The Wiz, the metropolitan area's largest electronics retailer, filed Tuesday for protection from creditors under federal bankruptcy laws. The company said it would close 17 of its 50 stores, mostly those outside New York City. (AP Photo/Ed Bailey)
Customers visit a Blockbuster Video store in East Amherst, N.Y., Monday, April 14, 2008. Blockbuster Inc. said Monday it has offered to pay more than $1 billion for struggling Circuit City Stores Inc., but the nation's second biggest consumer electronics chain questioned whether the movie-rental company can finance the deal. (AP Photo/David Duprey)