Gap posts surprising pace of gains despite declining sales

Yahoo Finance Live presenters discuss Gap’s second quarter results.

Video transcript

Brad Smith: And everyone, shifting gears here, let’s talk about the Gap for a bit. The spread is trading up 6% in the pre-market here, as the retailer takes action after posting a surprise pace in second-quarter earnings. Gap dropped its full-year guidance, however, citing shifts in consumer behavior toward more formal wear than casual wear here. Breaking down some numbers, model sales were actually down 10% year over year. They also saw their online sales drop by 6% compared to last year. Store sales even fell by around 10%.

BRIAN SOZZI: It’s awful.

JULIE HYMAN: I don’t feel the usual anger emanating from…

BRIAN SOZZI: Well, I’m getting there.

JULIE HYMAN: –On Sozzi’s side–

BRIAN SOZZI: I arrive there.

JULIE HYMAN: –of the whiteboard.

BRIAN SOZZI: I want to attract people. I want to attract people because it’s a terrible neighborhood. I think a lot of people already knew that. Simeon Siegel, we talked about that yesterday when he came to talk about Victoria’s Secret. Bad quarter from a company that continues to do very poorly, and I appreciate what interim CEO Bob Martin said on the conference call. We need to act. We plan to do all of these things.

Well, I mean, let’s be real, Bob Martin. You’ve been on the board since 2002. You and a bunch of other people have destroyed a lot of value at Gap. These are the same people who saw Gap shares go from $45 to $10 now. And now he’s leading the company as CEO and also helping lead the CEO search.

I mean, it’s a colossal train wreck. It’s horrible. And you have no clue about this conference call, they have a clue what they’re doing and a clue how to fundamentally fix this business. They didn’t tease an Athletica sale. They didn’t tease an Old Navy spin-off. They didn’t tease that they were going to close 700 stores in Gap, which they probably should have done years ago.

It’s a big problem. There’s no growth in this business, except for Banana Republic, which magically sells clothes to people returning to the office. But terrible work at this company, and it’s gonna keep getting worse.

JULIE HYMAN: I just bought some stuff from Athleta, actually.

Brad Smith: Yeah?

JULIE HYMAN: They were making a sale. They didn’t used to– I thought–

BRIAN SOZZI: Because they lacked styles. They talked about it on the call.

JULIE HYMAN: –Athleta wasn’t used to having sales, by the way. And now it’s a business that has sales. Lululemon is kind of in the same category there in terms of athleisure. It’s interesting to me the inventory management that the company is trying to do. We’ve done our inventory tracking, haven’t we? 37% was the increase in inventory year over year. Not as bad as some of the others we’ve seen, but still not great.

What’s interesting here is that they do something called wrap and hold. So Gap is known for its basics, right? So what they plan to do is with some of the things that they consider perennial favorites, basics, evergreen items, that don’t sell, they’re going to put them away. They’ll wrap them up and keep them, then take them out when they think people want them. I mean, but hey. But there are problems with that, of course, because even the basics have changing styles and trends. It is therefore still a risky strategy.

You know, I’ve been wondering watching all these companies building up inventory, especially in the apparel industry, what happens to all of this? They wrote, what, $58 million in inventory. Now a part is packed and kept. Part of it is put up for sale and they try to eliminate it that way. A portion goes to the liquidators.

Like, inevitably, how many clothes are ending up in our landfills right now that these companies can’t sell? How much is sent to other countries to try to dump it and the people there don’t wear it and it ends up in the dumps? Like, there’s so much waste right now because of all this inventory.

BRIAN SOZZI: You know who you can blame for that in Gap? Bob Martin and many of this board members who have been here since 2002, and that includes the Fisher family. At what point do they just decide we’ve had enough of this nonsense. Let’s just sell our shares. Let’s get out of this business that our parents started, and go buy some rich art and try to make an investment that way because they’ve all done a terrible job.

Brad Smith: It could be worse. They might have succeeded in creating Old Navy when they tried for a few years.

BRIAN SOZZI: They ran–

Brad Smith: Who would you have? You would have Gap, you would have Banana Republic.

BRIAN SOZZI: You would have a chain of zombies in Gap.

Brad Smith: And you would have Athleta, which, yes, of course, the growth, but at the same time you have the growth at Lululemon, the growth at Nike, the whole competitive landscape as well. However, I think Athletica, which has the next – it’s legs for growth right now because Old Navy, I mean, those sales are down about 13% from last year.

JULIE HYMAN: Well, Athleta has been the legs, but not the last quarter.

Brad Smith: Not the last trimester.

JULIE HYMAN: Last trimester, something shook with those legs, didn’t it?

BRIAN SOZZI: Am I angry enough? Was I angry? Was I angry enough?

JULIE HYMAN: You were a little angry. Yeah, that’s–

BRIAN SOZZI: Yeah, I was warming up. I can feel it. I need to calm down. It’s a long show today.

JULIE HYMAN: OK OK. Deep breathing. Do some meditation.