Smaller Competitors Tear Gap Apart

Where did Gap Inc.’s (NYSE: GPS) customers go? March same-store sales fell 6%. The figures were particularly brutal for the company’s Banana Republic stores, which fell 14% by the same measure, and Old Navy, where same-store sales dropped 6%. While larger competitors are almost certain to be the cause, a set of smaller ones have become Gap’s enemies.

While Wall Street has been somewhat pessimistic about American Eagle Inc. (NYSE: AEO), its same-store sales rose 4% in the most recently reported quarter. American Eagle is much smaller than Gap, so its sales cannot be the only enemy. The retailer had revenue of $3.5 billion last year, compared to Gap’s $15.8 billion. American Eagle’s shares have handily outperformed Gap’s in the past year.

Abercrombie & Fitch Co. (NYSE: ANF) has done better than expected recently. Same-store sales from the most recently reported quarter rose 1%. Sales of its Hollister brand rose 4%. Wall Street had expected worse.

Gap has more competition from H&M and Zara, as well as the ubiquitous Amazon.com Inc. (NASDAQ: AMZN).
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Gap closed 175 stores last year, and that has been a pattern going back three years. Based on recent same-store sales, it may have to close more. Gap has been unable to innovate quickly enough to fend off rivals.

Another of Gap’s troubles will continue well into the year. The company announced inventory was bloated:

The company noted that it is entering April with more inventory than planned which the company expects will pressure its gross margin rate for the first quarter of fiscal year 2016.

Based on current trends, Gap cannot eat through that inventory as fast as it would like.