Gap’s shares fall in late trading on weak profit outlook

NEW YORK, N.Y. – Gap’s shares took a hit in after-hours trading Thursday after the clothing chain offered a weak profit outlook.

The outlook came as the San Francisco-based chain reported a 33 per cent drop in fourth-quarter profits as business was hurt by a strong U.S. dollar and strategic moves to turn around its ailing business.

The results show the continued challenges facing CEO Art Peck, who took over the helm a year ago. The company has worked to improve its fashions and trimmed its fleet last year. But it hasn’t been able to get shoppers to buy without a fat discount. The company has been long plagued by poor fit and quality. Even Old Navy, until recently a bright spot, saw its business falter in the last few quarters.

Gap has also had some management upheaval. Last fall, Old Navy President Stefan Larsson, who spearheaded the growth of Old Navy, resigned to take the CEO job at Ralph Lauren Corp. Gap is still looking for a successor.

Then, soon after, the creative director for the Banana Republic brand, Marissa Webb, who was hired to re-energize Banana Republic, stepped down after dismal results.

“My team and I have a great deal of urgency,” Peck told investors during a conference call on Thursday. “I know what this company is capable of at our best. I know what these brands are capable at their best. I and my team are focused on not just achieving that for a moment, but achieving that with consistency.”

Peck told investors that Gap even has stumbled on the basics like proper fit. At Banana Republic, blazers were a dud because the average woman couldn’t fit her arm through the sleeve. Peck also told investors that Gap is “buying what’s working, rather than guessing what’s going to work.”

The company is also redesigning its website and blending inventory across online and physical stores together so they have a better view of customer demand.

Peck said that historically, it used to be that the moment of truth was when a customer crossed the line to go to a physical store.

“Today, as a company, we’re increasingly seeing the moment of truth is when a customer through their phone comes into our digital store and we either win or lose their affection, their engagement, and ultimately their sales,” he said.

Gap faces an uphill battle to turn around results.

The chain says fourth-quarter profits were $214 million, or 53 cents per share, for the three-month period ended Jan. 30. That compares with $319 million or 75 cents per share, in the year-ago period.

Adjusted profit results were 57 cents per share, a penny above analysts’ estimates, according to FactSet.

Revenue slipped nearly 7 per cent in the quarter to $4.39 billion, in line with estimates.

Gap’s revenue at stores opened at least a year fell 7 per cent in the quarter. By division, Gap’s metric fell 6 per cent, while Banana Republic suffered a 10 per cent drop, and Old Navy was flat. Peck said that Old Navy, which has had four years of sales growth, hit a bump last year because of a couple of style mistakes. But he assured the mistakes have been corrected.

As for Banana Republic, Peck said that the brand got too fashion-forward and he said customers will see a return to more classic clothes this spring. At Gap, which has been long suffering, Peck said that it’s focusing on overhauling key areas of business like denim.

Looking ahead, Gap said it expects earnings per share for fiscal 2016 in the range of $2.20 to $2.26 per share. That is well below analysts’ forecasts for $2.43 per share. The forecast includes the negative currency impact of about 19 cents, or over $120 million pretax. That’s because of the strong U.S. dollar which hurts the value of revenue generated overseas.

The company also announced its board authorized the repurchase of up to $1 billion in stock.

Gap Inc.’s shares fell close to 4 per cent, or $1.10 per share, to $26.50 in after-hours trading. During regular trading, the stock rose 32 cents to $27.60.