Gap Inc. plans to open an Old Navy store in Japan within 18 months, the brands… (Qilai Shen, Bloomberg )
Long-struggling Gap Inc. is closing nearly 200 stores and downsizing others in the U.S. as it focuses on international expansion, the San Francisco company said Thursday.
The apparel giant — parent to the Gap, Banana Republic and Old Navy chains — plans to reduce the number of Gap brand stores in North America to 700 by the end of 2013, a 21% decrease from the 889 that it operated at the end of July.
A Gap Inc. spokeswoman said the company wouldn't reveal which stores would close.
"We've been in some malls for a really long time; in some instances the demographics may have changed, so it may not make sense for a Gap brand store to be there anymore," spokeswoman Louise Callagy said. "The goal overall is to return the brand to health, and part of a healthy brand is a high-performing fleet" of stores.
Thursday's announcement was part of an ongoing company strategy to reduce the combined square footage of Gap's stores across all major brands in North America.
Gap Inc. has suffered from weak sales for years as shoppers turned to trendier rivals. Also, the company targets the middle-income market, which often leaves it stuck between discounters and upscale brands.
In its most recent quarter, Gap Inc. reported a 19% decline in profit and a slump in sales at stores open at least a year. Its stock is down 19% year to date, while the average retail stock in the Standard & Poor's 500 index is up 4%.
Although it has had some product successes — namely a line of premium denim that launched at Gap stores two years ago — many of its fashions, such as women's tops, have underperformed.
Analysts have been especially critical of the company's seemingly nonstop discounts, which are hurting profitability and train consumers to wait for deals instead of paying full price. On Thursday, for instance, Gap brand's website was offering 30% off online purchases.
"Particularly in the current economic environment, when there's not a sale it's tough to get consumers to buy basics," said Edward Yruma, a retail analyst at KeyBanc Capital Markets. "Either it has to be new and compelling or it has to be a deal, and part of the problem is where Gap falls on that spectrum."
Art Peck, president of Gap North America, admitted that many of the brand's merchandise this year had failed to resonate with shoppers, which meant stores "had to discount aggressively to move the product through."
"Honestly, when we looked at the product in the pipeline, I think we all felt like it was going to be a bit of a rough road — it wasn't what our team felt was right," he said. "What we have been heads-down focused on in the last few months is putting product into the store that is brand-right and meets what our customers expect."
Gap Inc. is also scaling back some of its Old Navy stores in North America. Although the low-cost brand's store count is expected to stay about the same, the locations will continue to downsize through store remodels, relocations and by leasing space back to commercial real estate landlords.
By the end of fiscal 2013, Old Navy "expects to potentially remove another 1 million square feet," the company said in a statement.
The announcement was made at Gap Inc.'s annual investor meeting in New York, where executives provided a comprehensive business overview of the company that was heavily focused on overseas growth.
Those plans include the opening of an Old Navy store in Japan within 18 months, the brand's first location outside of North America, and nearly tripling the number of Gap brand stores in greater China to about 45 by the end of next year.
The first Gap flagship in Hong Kong is set to open in a few weeks, and the company's first Banana Republic flagship in Paris is scheduled to open this year.
Executives also noted that domestically, the company would balance its Gap brand store closings by adding about 50 new Gap Outlet stores in North America.
"In North America, we're taking a number of steps to improve sales in the near-term," said Glenn Murphy, chief executive of Gap Inc.
Gap Inc. shares rose 7 cents to $17.92 on Thursday.
Gap Inc. has about 3,100 company-operated stores and roughly 200 franchise stores in 36 countries; it ships online orders to more than 90 countries.
In August Gap Inc. reported that fiscal second-quarter profit fell to $189 million, or 35 cents a share, from $234 million, or 36 cents, a year earlier. The company attributed the drop to rising costs and deep markdowns at its stores.
Meanwhile, sales at stores open at least a year, known as same-store sales and considered an important measure of a retailer's health, fell 2% during the quarter. Major divisions Gap North America, Banana Republic North America, Old Navy North America and International all posted the same or worse same-store sales results than in the second quarter of 2010.
Gap Inc. also reported that same-store sales fell 4% year over year, the worst results in September among 23 major retailers tracked by Thomson Reuters.
Yruma, the KeyBanc analyst, said Gap's stores had swelled to an unproductive size and called the plan to close stores a "positive move."
"But at the end of the day," he said, "what drives retailers is good product and we have yet to see that."