Gap Inc. (GPS) Q1 2016 Earnings Preview: Shares Plunge As Old Navy Loses Buoyancy, Banana Republic Can’t Get Traction

Angelo Young

A shopper carries a Gap shopping bag in Hong Kong, China, Nov. 25, 2011. Photo: Jerome Favre/Bloomberg via Getty Images

Gap Inc. shares plummeted by double digits Tuesday after the U.S. apparel retailer reported a significant drop in its budget Old Navy brand and continued weakness in its more upscale Gap and Banana Republic stores. The stock closed down 11.5 percent to $19.30, its lowest price since the start of 2013.

The plunge came after the company reported larger-than-expected declines in same-store-sales, a key retail metric that excludes newer stores, and extended a grim first-quarter earnings forecast. Several Wall Street equity firms subsequently lowered their 12-month price targets from around $40 to about $22, according to Thomson Reuters data.

“Our industry is evolving and we must transform at a faster pace,” company CEO Art Peck said in announcing the grim sales numbers.

Traditional apparel retailers have been struggling with the rise of so-called fast fashion companies like H&M and Zara, which focus on rapidly delivering new fashion trends from the runways of the fashion elites to their mainstream-budget outlets to capitalize on short-term trends and consumers’ desire to get more for less. (It’s a practice that critics say feeds environmentally and economically wasteful consumer habits.)

On May 19, Gap will post results of its three months ended April 30 after markets close in New York. As of Tuesday, analysts polled by Thomson Reuters expect Gap to post a 43 percent drop in profit, to $143.2 million, or 36 cents per share, from $239 million, or 56 cents per share. Sales are expected to hit their lowest point for the first quarter since 2012, to $3.51 billion from $3.66 billion.

April sales from the budget Old Navy brand dropped 10 percent from a decline of 6 percent in the same month last year. Old Navy spent much of last year buoying the company amid significant drops in traffic for the middle-budget Gap stores and the more exclusively priced Banana Republic outlets.

But in September, Gap lost the man who reinvigorated Old Navy, Stefan Larsson, who moved to head the luxury fashion brand Ralph Lauren. Perhaps coincidentally, October was the last month Old Navy grew its year-over-year sales. Since then, Old Navy sales have been flat or down between 6 percent and 10 percent.