Gap falls into deeper hole during slow holiday shopping season

By Michael Liedtke AP Business Writer
Monday December 24, 2001

SAN FRANCISCO – While other merchants cash in on the busiest shopping season of the year, the Gap Inc. is trying to dig itself out of a hole. 

Just how badly San Francisco-based Gap fared in the pivotal holiday shopping season won’t be disclosed until Jan. 10, but analysts are bracing for horrendous results. 

The low expectations come after a 25 percent drop in November sales at Gap stores open for at least a year. It marked the 19th consecutive month of declining comparable-store sales for Gap, which runs Old Navy and Banana Republic stores in addition to its flagship chain. 

The company already has warned it will sustain a major loss in its fiscal fourth quarter — a retailing rarity. 

Even in recessions, the fourth quarter typically heralds the most prosperous time of the year for retailers. But the Gap’s results this year have grown progressively worse since the company registered a first-quarter profit of $115 million. 

“It looks ominous for the Gap,” said industry analyst Joseph Teklits of Wachovia Securities. “If they can’t make money now, it’s kind of hard to believe that they will be able to make money in the first and second quarters of next year either.” 

If the losses mount, analysts fear the company might fall from the good graces of its lenders, a development that could trigger a liquidity crisis. Reversing the losses may require the traditionally hard-charging Gap to close dozens of stores next year, analysts predict. 

Gap declined to comment, preferring to let the company’s remarks in a Dec. 6 sales update speak for its position. In that phone call, the company said it’s “reasonable” to expect its November slide to continue through January. 

Without providing specifics, the Gap warned its fourth-quarter loss will exceed an operating loss of $48 million in the third quarter. Industry analyst Jennifer Black of Wells Fargo Van Kasper projects the Gap will lose about $135 million, a far cry from the company’s $272 million profit at the same time in the prior year. 

The Gap’s bleak outlook serves as a grim reminder of how far the company has fallen from its fashion-setting heyday in the late 1990s. 

Propelled by hip commercials touting khaki pants and a positive buzz by its then-new Old Navy stores, the Gap emerged as one of the industry’s biggest money makers during the last of the 1990s, surging to a profit of $1.1 billion on sales of $11.6 billion in its fiscal year ending in January 2000. 

Emboldened by its success, the Gap aggressively expanded, swelling from 1,854 stores five years ago to 4,176 stores today. 

But the company isn’t getting much of a return from the new stores. The company’s sales per square foot of store space is roughly the same as it was in 1995, Teklits said. 

The expansion continued even as Gap alienated many of its customers by emphasizing more trendy clothes popular among fickle teen-agers. 

As it lost shoppers, the Gap turned off investors, too. Since peaking at $53.75 in February 2000, the Gap’s stock has plummet by about 75 percent, wiping out $34 billion in shareholder wealth along the way. 

The retailer’s troubles were evident during a recent visit to one of its Old Navy stores in downtown San Francisco. With a week to go before Christmas, Old Navy had slashed some prices by as much as 75 percent. Despite the heavy discounting, racks and racks of unsold merchandise remained in the four-story store. 

Even shoppers who did buy some clothes said they weren’t impressed with Old Navy’s selection. 

“It seems like they have gotten away from the preppy stuff and gone more toward ’Euro-trash’ styles,” said Lydia Russell, 19, of Orinda, Calif. 

Marla Harrity and friends Mendy Spurgeon and Katherine Aronson-Lasigen said they almost always found something they liked at Old Navy a couple of years ago. Now, Harrity says, “It just seems like we’ve outgrown this place.” Harrity is 13 years old. 

Old Navy’s selection is meeting such resistance that the chain will have to slash prices even more drastically to clear the shelves after Christmas, Black said. 

While making space for more appealing clothes will help, Black and other industry analysts say that won’t be enough to solve the Gap’s deepening problems. Store closures are considered likely, particularly at Old Navy, a discount chain that has turned into the company’s biggest headache.