Business

Gap needs Old Navy to stay afloat

How much more track is left in Old Navy ahead of Gap GPS? -18.61%

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Gap shares tumbled more than 20% on Friday morning after the company said it would lower its fiscal first-quarter guidance, citing challenges at Old Navy. Revenue for the first quarter is now expected to be at least 10% down year over year. Gap also said that Old Navy’s current chief executive officer will leave her post this week.

This follows a disappointing fourth quarter for the value-tier brand, which saw flat like-for-like sales growth compared to two years earlier. In contrast, its Gap and Athleta brands grew 3% and 42%, respectively, on the same basis last quarter.

The weakness at Old Navy, which accounts for more than half of Gap’s annual revenue, is a worrying sign. Except for 2020, Old Navy has recorded annual growth every year since 2014, an achievement unmatched by any other brand within the Gap family. Old Navy used to stand out so much that the company considered spinning it off three years ago — to much initial fanfare.

Last quarter, Gap said its Old Navy customers had started looking for “going out wear” like dresses and denim, rather than the comfort-oriented clothing the brand had been offering. Supply chain issues have made it difficult for Old Navy to quickly adapt to changing tastes. That could mean lower margin in the coming quarter as the company looks to discount inventory.

Of course, these can be temporary problems, but they can also have lasting effects. Old Navy’s affordable, family-friendly apparel should be just the kind of products that inflationary households will be looking for today. If they can’t find what they want at Old Navy, they’ll go elsewhere, and as sister brand Gap knows, enticing a disappointed customer back can be difficult. Additionally, the ongoing challenges in the supply chain are not a flattering sight for a company that routinely touts its economies of scale.

Gap’s stock is now valued at about a third of the sales it’s projected to generate over the next 12 months, closer to low-growth, low-margin grocery stocks than apparel peers. Gap’s patience is running out, and the new head of the Old Navy will have a major makeover ahead of him.

write to Jinjoo Lee at jinjoo.lee@wsj.com

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https://www.wsj.com/articles/gap-needs-old-navy-to-stay-afloat-11650638318?mod=rss_markets_main Gap needs Old Navy to stay afloat

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