Will Gap's Store Closures And Layoffs Turn It Around?

The consumer-driven retail industry has always posed challenges for the companies operating in it, given the volatility in consumers’ tastes and preferences, and their tendency of shifting to rival firms in a jiffy.

The Gap Inc.'s (NYSE:GPS) namesake brand has been combating the same hurdle as a number of fashion misses led the company’s customers to switch to other brands like H&M, and Zara, among others. This, combined with other factors, has resulted in significant sales losses for Gap. This is evident as the brand has been posting dismal comparable store sales (comps) data for five consecutive quarters now.

In an attempt to bring the Gap brand back on the growth trajectory, management announced plans to shut down underperforming stores, mainly in North America, and conduct layoffs at its headquarters.

Gap announced plans to shutter 175 specialty stores in North America in order to enhance the brand’s productivity and retain its presence in more successful locations. Out of these, the company will close 140 outlets in the current fiscal year, with other closures lined up for the next few years. Simultaneously, the company intends to shut down some stores in Europe.

The company stated that this decision will not have any impact on Gap Outlet and Gap Factory Stores.

Despite these closures, the brand will continue to have a network of 800 stores, including 500 Gap specialty locations and 300 Gap outlet stores in North America. Additionally, it will operate worldwide through 1600 company-operated and franchise outlets, apart from serving customers online and easing their shopping experience.

Additionally, management plans to conduct about 250 layoffs at its headquarters during the current fiscal year, mainly in North America. Per sources, the company will help its affected employees find employment in nearby locations.

All this comes as part of the president of Gap Global – Jeff Kirwan’s aggressive strategies directed toward enhancing its brand structure and positioning it well to face competition on the international platform. Since his appointment in Dec 2014, Kirwan has altered the Gap brand’s leadership team in an effort to restore its product operating model, bringing about improvements in speed and responsiveness.

Impact on Numbers

The company anticipates the store closures to result in annual sales loss of roughly $300 million. Further, one-time costs associated with the aforementioned moves are expected to amount to about $140–$160 million, most of which will likely be realized in second-quarter fiscal 2015. Also, nearly $55–$75 million of these expenses will be non-cash.

The one-time costs include lease buyouts, employee-related costs in conjunction with organizational amendments, asset impairments mainly associated with the Gap fleet, and write-offs of inventory and fabric. Nevertheless, Gap envisions these strategies to generate annualized savings of about $25 million, starting fiscal 2016.

However, management reiterated its earnings guidance for fiscal 2015 to be in the range of $2.75–$2.80 per share. This excludes the impact of the Gap brand’s turnaround efforts.

The Bottom Line

Though the aforementioned plans appear difficult and cumbersome, these are ultimately expected to pave a better future for the company’s customers, shareholders and employees.

Zacks Rank

Gap currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the apparel-shoe industry include American Eagle Outfitters (NYSE:AEO), Express Inc. (NYSE:EXPR), each with a Zacks Rank #1 (Strong Buy), and Citi Trends Inc. (NASDAQ:CTRN), with a Zacks Rank #2 (Buy).

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