GAP to Close 200 Stores -- Which Retailer Is Next?

Gap (NYSE: GPS) took the coward’s way out. Buried among announcements about its global sales plans, it reported that “the company is committed to rebalancing its specialty and outlet stores within North America, resulting in about 700 Gap specialty stores and about 250 Gap Outlet stores by year end 2013. This represents a 34 percent decrease in the Gap specialty store fleet when compared to the end of 2007.” Said another way, Gap will shutter 200 stores on balance in the U.S. this year and next. The announcement opens the door to similar actions by struggling retailers as the holidays approach.

It is easier for companies to release bad news when one of their large competitors has. Retail firms can say that Gap had to cut stores because the entire industry has trouble. Holiday sales are expected to be weak this year, up less than 3%. Many American clothing manufacturers overbuilt when the economy was strong four to seven years ago. Gap will fire hundreds of people. Why should every other retail firm not do the same now that the sector faces a new set of issues?

Gap’s position is reflected in its share price, which is down more than 20% in the past two years. That is much worse than Macy’s (NYSE: M), Nordstrom (NYSE: JWN) or even Sears (NASDAQ: SHLD), although none of these compete with Gap across all product lines. Other stores such as Aeropostale (NYSE: AOR) and American Eagle Outfitters (NYSE: AEO) have fared worse in the stock market. Between them, the two have 2,00o stores and almost certainly too much capacity.

The 2011 holiday season is predicted to be one of mediocre sales. That will be true for many chains. The laggards like Gap, however, already know they are in trouble, and have decided to try to downsize their way out of the problem.

Douglas A. McIntyre