Gap has come to the conclusion that speed to market is the way forward for its signature brand with the US retail giant taking steps to compete against its more nimble, fashion-focused rivals.
The retailer announced plans Thursday to test small batches of product in selected Gap stores next spring and then quickly reorder if they are popular. It’s a strategy that has already made its mark on sister brand Old Navy, which is currently Gap Inc's star performer.
Gap chief executive Art Peck said on a conference call that the company was trying to build the speed-to-market capability as quickly as it can.
And the change can’t come quickly enough as profits growth and confidence look to be in short supply at the company. The news about the new initiative came on Thursday after it reported a second consecutive fall in quarterly earnings, hurt by weak sales at the Gap brand where fashion missteps dulled shopper appetite for its safe offer. And Gap said nobody should expect a pick up in sales before the key Holiday period either.
For a retailer that normally prides itself on turning in a good profit even when sales are soft, the latest figures make tough reading, although they were predicted.
Net income fell by more than a third to $219m/52 cents per share for Q2 ended August 1, from $332m/75 cents a year ago. Not that Gap itself was entirely to blame as crucial costs related to its turnaround, plus the stronger dollar and shipment delays over which it had no control took their toll.
The company said it expects to record $130m-$140m in restructuring charges alone for the year, including store closure costs.
Excluding the negative impact of about $0.12 from the strategic actions, the company earned 64 cents per share, in line with analysts’ view.
Sales continue to suffer too. Total sales fell 2% to $3.9bn, missing analysts’ estimate, and comparable sales fell 2%, hurt by a 6% drop at Gap brand and a 4% decline at the Banana Republic division.
Gap's Old Navy, however, continues to steady the ship with its ability to attract customers by offering affordable fashion.
Comparable sales at Old Navy increased 3% in the quarter, and sales rose to $1.67bn.
Gross margin, meanwhile, narrowed to 37.4% from 39.4% a year earlier.
Gap affirmed its full-year earnings at $2.75-$2.80 per share.
"I remain confident in our strategies to improve business performance and drive loyalty going forward," said Peck."Our evolving product operating model is laying the foundation to more consistently deliver on-trend product collections across our portfolio."
Target Corp showed just how success is achieved in Q2 as profits and sales surged. The value retail giant reported its latest results yesterday and easily outshone its bigger rival Wal-Mart. How did it achieve that? It was all about effective cost cuts and creating the products customers want – with apparel and home products the standouts.
But one word of caution - the year-on-year comparisons are going to start getting tougher from here so Target knows it has to keep upping its game.
But back with the celebrations... After reporting its sixth straight hike in quarterly sales, Target also raised its full-year earnings forecast for a second time.
New COO John Mulligan highlighted strong sales in the retailer’s signature categories, especially in apparel where he said investments in product and store presentation had helped Target log strong gains in an area in which many of its rivals continue to struggle.
“Apparel has led the way all year for us,” Mulligan said. “We’ve made investments in store presentation. You can’t just slap up mannequins and expect people to buy things.”
More precisely, denim was a key contributor to the company’s better-than-expected quarter.
“We’ve seen really strong performance in ready-to-wear, and most recently, a very positive response to the changes we’ve made in denim,” noted CEO Brian Cornell. “So the improvements we’re seeing in those categories are really driven by great quality, following the trend curves, bringing great style and fashion to our guests.”
More than 80% of Target’s strong digital sales growth came in home and apparel, said Cornell.
Target had announced a major redesign of its denim offerings at the end of July. Its denim selection promises “new styles and revamped fits, fabrics and finishes, comparable to what you’d find at a high-end department store, all for $30 or less”.
So how good were the figures? Adjusted earnings rose to EPS $1.22 for the quarter ended August 1, outstripping the $1.01 for the same period in 2014, and way ahead of the $1.11 analysts had expected.
Cost cutting was also at the heart of the impressive earnings gain. Under Cornell’s year-long tenure, Target has embarked on an effort to save $2bn over two years from corporate revamping, leaner supply chains and more efficient product sourcing.
Sales rose 2.8% to $17.4bn from $17bn the prior year, matching analysts’ view. Online sales jumped 30%, contributing 0.6% to the overall sales increase, Target said.
Same-store sales rose 2.4%, better than the 2.2% rise analysts had expected.
Target has been overhauling its stores, focusing on fashion babies’ and children’s goods and wellness to increase customer traffic. Those categories each grew more than 7% a pace triple the retailer’s average, Mulligan said.
The company also raised its full-year EPS outlook to range $4.60-$4.75, up from a prior outlook of $4.50-4.65. The retailer had earlier raised the lower end of its forecast by 5 cents to $4.50-$4.65.
Target also said the key now will be keeping desired items in stock, especially since consumer traffic has increased. Inventory will be a priority after a couple of quarters after Mulligan had admitted “our in-stocks have been deteriorating.”
On Wednesday, Target blamed its "incredibly complex supply chain" for unacceptable stock levels at its stores this year.
“We know we’ve got more work to do to ensure that we do meet the needs of the guests every time they shop,” said Cornell. “And critically important in meeting those needs is to make sure that we provide a great in-store experience and dramatically improve our in-stock conditions, particularly around core essentials.”
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