90s fashion retailer closed 350 stores, and it isn't enough

Few retail chains that filled malls in the 1980s and 1990s still exist today.

Teenage me could have shopped at Chess King for shiny shirts, Gadzooks for baggy pants, or gone a little classier and purchased some dressier clothes at Structure. All of those chains were fairly, if not very, popular for a minute, and none of them exist now.

Tory Burch Chief Client Officer Francesca Danzi told Forbes that it’s a major challenge for a brand to remain relevant across decades.

“Enhancing retail experience is key and goes beyond adding omnichannel capabilities that boost convenience. We are witnessing the rise of experiential retail that is reshaping the store of the future,” she said.

Danzi does not see the so-called retail apocalypse as a crisis where stores are closing, but as an opportunity to right-size store portfolios.

“Actually, what I see is the continuous integration and convergence of physical stores, e-commerce websites and digital content/marketing platforms. Relevancy and personalization are key,” she added.

It’s a changing market that makes the ongoing survival of Gap Inc. impressive. The Gap, the company’s flagship brand, was a hip mall chain in the 1980s that maintained that status through the 1990s.

Now, the company has completed its process of closing 350 stores, but the company still faces a difficult cost equation.

The Gap delivers mixed results

“In the second quarter, while the company exceeded our profit expectations, we delivered a net sales decline of 2% with mixed performance on the top line across the portfolio. While not the revenue outcome we wanted, continued operational and financial rigor contributed to gross margin strength,” Gap CEO Richard Dickson said during the chain’s second-quarter earnings call.

The Gap brand was the clear standout.

“The Gap brand delivered another exceptional quarter with comparable sales increasing 10%, and Banana Republic continued to build momentum, posting its fifth consecutive quarter of positive comps. Athleta’s top line remained pressured, though we saw encouraging improvements in inventory productivity,” he added.

Old Navy, which was the company’s strength in the 2000s and 2010s when the chain’s namesake brand struggled lagged, has been dragging the company down.

“At Old Navy, as we previewed on last quarter’s call, seasonal categories continued to weigh on performance. While we took actions to address this as the quarter progressed, we also experienced a slowdown in traffic, which led to a modest miss versus our expectations,” the CEO shared.

Gap needs to cut costs

In a process that began in 2020, Gap Inc. closed 220 Gap and 130 Banana Republic stores.

At the time, the company made it clear that it was mostly exiting mall stores in favor of cheaper strip malls, open-air city centers, and outlet malls.

“We’ve been overly reliant on low-productivity, high-rent stores,” former Gap CEO Mark Breitbard told Boston 25 News. “We’ve used the past six months to address the real estate issues and accelerate our shift to a true omni-model.”

The long-term goal was to reduce ROD, rent, occupancy, and depreciation, which are fixed or semi-fixed costs associated with store operations.

That strategy worked, according to CFO Katrina O’Connell, but more work remains to be done,

“We have previewed that ROD deleverages this year. It is a new dynamic for us. I think it represents 2 things. First of all, we’ve largely concluded closing our underperforming stores. The pace of the closures that we were doing when we were closing 350 stores had provided meaningful benefit to ROD,” she said.

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Now, the retailer has moved to opening stores, and that has created a negative when it comes to expenses.

“And now we’re modestly opening stores. So that does impact the ROD line as the closures abate, and we end up with not that ROD favorability,” she added.

The new stores, she noted, “does help us on the sales line,” but it leaves the company in a position where it needs to cut costs without the lever of being able to close high-cost, low-profit stores.

Gap reported mixed results

Gap Inc. saw its sales drop, but increased its profitability in the second quarter and returned $262 million of cash to shareholders in the form of share repurchases anddividends during the quarter.

Some financial highlights included:

• Net sales of $3.7 billion were down 2% compared to last year. Comparable sales were down 1%.
• Store sales decreased 3% compared to last year.
• The company ended the quarter with nearly 3,500 store locations in about 35 countries, of which 2,471 were company-operated.
• Online sales decreased 1% compared to last year and represented 35% of totalnet sales.
• Adjusted net income was $190 million and adjusted diluted earnings per share were $0.52, excluding the net IEEPA tariff recovery and related interest income.

The Gap brand itself was the clear leader for the company.

“Second quarter net sales of $844 million were up 9% compared to last year. Comparable sales were up 10%, with the brand’s focus on big ideas and culturally relevant storytelling continuing to drive strong performance in destination categories including denim, fleece, and kids and baby,” the company shared.

Experts and analysts have mixed opinions on Gap

GlobalData Managing Director Neil Saunders acknowledged that Dickson has shifted the culture at the company.

“I stand by that view, mostly because I think it’s important to give due recognition to positive changes – especially in an area where a retailer has traditionally struggled. However, as I also mentioned, this is only one piece in the jigsaw puzzle of change that needs to occur for Gap to get back on track,” he wrote on LinkedIn.

He was critical, however, of the company’s merchandise after a visit to a local store.

“In menswear, the assortment is still incredibly bland. There is very little, if any, newness. None of the products are innovative. Few have those little twists or styling embellishments that make them ‘must-have’ items. Everything is just very flat,” he added.

Saunders made that assessment after visiting a Gap store previously, and his comments offer a useful counterpoint to the brand’s much stronger Q2 results.

Some analysts, however, remained concerned about the problems at Old Navy.

Jefferies analyst Corey Tarlowe downgraded Gap (GAP) to Hold from Buy with a price target of $23, down from $29, TipRanks reported.

“The firm is ‘increasingly concerned’ about softer trends at Old Navy, with its data pointing to higher promotions. Gap’s Q2 offers the easiest comparison of the year, yet trends have lagged, and the comps get tougher in the second half of the year, the analyst tells investors in a research note. Jefferies downgraded the shares to reflect its weakening survey metrics for Gap,” the website reported.

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