Gap needs the old fleet to stay afloat

Gap shares fell after the company cut its first-quarter guidelines, citing challenges at Old Navy.


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Victor J. Blue / Bloomberg News

How much more is left at Old Navy before Gap GPS -17.98%

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Gap shares fell more than 20% Friday morning after the company said it lowered guidelines for its fiscal first quarter, citing challenges at Old Navy. It now expects sales to fall by at least 10% in the first quarter compared to a year earlier. Gap also said the current CEO of Old Navy is leaving his post this week.

This follows a disappointing financial fourth quarter for the value level brand, which experienced flat, comparable store sales growth compared to two years earlier. In contrast, the Gap and Athleta brands experienced growth of 3% and 42% respectively in the last quarter on the same basis.

Weakness at Old Navy, which accounts for more than half of Gaps’ annual revenue, is a worrying sign. With the exception of 2020, Old Navy has experienced annual growth every year since 2014, an achievement that no other brand in the Gap family has achieved. At one point, Old Navy stood out so much from the herd that the company considered turning it off – to great initial fanfare – three years ago.

Last quarter, Gap said their Old Navy customers had begun searching for “going out” clothing such as dresses and denim rather than the comfort-driven clothing the brand had offered. Supply chain problems have made it difficult for the Old Navy to quickly adapt to changing tastes. This may mean a lower margin in the future as the company tries to sell out of inventories through write-downs.

Of course, these can be temporary problems, but they can also have a lasting impact. Old Navy’s affordable, family-friendly clothing should be just the kind of product that inflationary households will be looking for today. If they can not find what they want at Old Navy, they go elsewhere, and as the sister brand Gap knows, a disappointed customer can be hard to lure back. Moreover, the continuing challenges in the supply chain are not a flattering look at a company that regularly highlights its economies of scale.

Gaps stock is now valued at about a third of the revenue it is expected to generate over the next 12 months, more in the vicinity of low-growth, low-margin grocery stocks than clothing peers. Patience is getting thinner at Gap, and the new head of the Old Navy will have a major makeover job on their hands.

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

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Published in print on April 23, 2022.

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