Election Section

Gap reports worsening sales losses in 19-month slide

By Michael Liedtke, The Associated Press
Friday December 07, 2001

SAN FRANCISCO — Once-hip retailer Gap Inc. remained an unfashionable place to shop in November, with comparable store sales plunging 25 percent from the same time last year — the steepest drop yet during the clothier’s 19-month slide. 

The miserable start to the holiday shopping season prompted Gap to warn that its fourth-quarter loss will be “considerably worse” than its third-quarter loss of $48 million, or 6 cents per share, excluding tax charges. 

Wall Street had expected Gap to earn 8 cents per share in its final fiscal quarter, based on the consensus estimate of analysts polled by Thomson Financial/First Call. 

The Gap’s deepening troubles could be good news for consumers, though. 

The Gap will slash prices to clear its shelves of unsold merchandise during the next two months, management said in a conference call Thursday. The biggest sales will probably occur at the company’s Old Navy chain, where comparable store sales during November fell by more than 30 percent. 

Though the Gap’s fortunes have been fading since its comparable store sales began falling in May 2000, Thursday’s news stunned some analysts. 

“These number mean the Gap has become a market share donor to other stores in the mall,” analyst Richard Jaffe of UBS Warburg. “I have never seen anything this bad in the 10 years that I have been following retailing.” 

Investors reacted surprisingly well to Gap’s continued sales losses. The company’s shares surged 62 cents to close at $14.20 Thursday on the New York Stock Exchange. This year, the stock is down by 44 percent. 

Thursday’s stock market gains reflect a belief that Gap’s management will correct its mistakes of the past two years and replenish stores with clothes that have more mass market appeal, analysts said. 

The turnaround will likely require the Gap to close stores during the next year and shrink the size of other locations, particularly at Old Navy, said analyst Jennifer Black of Wells Fargo Van Kaspar. 

“We believe the company has begun to do a lot of soul searching and may finally be ready to take this big step,” Black wrote in a note to clients Thursday. 

To lower its expenses, earlier this year the San Francisco-based company fired hundreds of administrative workers, marking the first layoffs in its history. 

The Gap’s troubles began when management strayed from its traditional selection of stylish, casual clothes and emphasized edgier clothes with teen appeal. Besides alienating many of the Gap’s older customers, the change made the company more susceptible to fickle fashion tastes. 

Because the Gap makes most of its clothes offshore, the company usually can’t change its fashion mix for at least six months, while smaller specialty merchants such as Wet Seal can shift gears in less than two months, said analyst Elizabeth Pierce of Wedbush Morgan Securities. 

Despite the Gap’s troubles, analysts believe the retailer can recapture the magic that once made it a trendsetter and made its stock a Wall Street darling during the last half of the 1990s. 

“There is still tremendous equity in the Gap brand,” Pierce said. “Consumers are still coming into the stores to look. They just need to get back to the essence of Gap.”