Gap Warns of Earnings Shortfall

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A Gap store in Chicago. ENLARGE
A Gap store in Chicago. Photo: Bloomberg News

Gap Inc., under pressure to turn around operations amid a prolonged sales slump, said it plans to close all its Old Navy stores in Japan and some Banana Republics mostly outside of North America by the end of its business year.

The San Francisco company also gave a cautious outlook for the remainder of the year, saying it needed “trends in the apparel retail environment” to improve from the first quarter to achieve Wall Street’s consensus earnings target for the year. On Thursday, Gap reported its fifth straight quarter of lower revenue and profit.

Altogether, Gap said it would close about 75 stores, largely abroad, and said it would book about $300 million in restructuring charges before taxes. It estimated the moves would save about $275 million a year.

The restructuring efforts, which follow dozens of store closings in North America last year, weren’t enough to protect the company’s investment grade credit rating. S&P Global Ratings downgraded the retailer to junk status Thursday. Fitch Ratings downgraded Gap to junk status last week.

“We believe meaningful industry headwinds have more than offset the company’s various operating initiatives and hurt the company’s competitive standing on a sustained basis,” wrote S&P credit analyst Helena Song, “as the company has weakened brand appeal and lost share to fast fashion retailers, online competitors, and off-price retailers.”

The Old Navy budget brand, which until recently had been performing better than Gap’s other brands, has struggled in recent quarters. In the first quarter, Old Navy sales at stores open at least a year fell 6%, while Gap same-store sales fell 3% and Banana Republic dropped 11%.

On a conference call, CEO Art Peck attributed the problems at Old Navy to “too much fashion, too much duplication in the assortment” and weak marketing in the first quarter. Mr. Peck said the company is stepping up its TV commercials after pulling back in April. “We had ineffective TV. TV is a big brand driver for Old Navy,” he said.

The changes come after Old Navy President Stefan Larsson, who had been credited with turning around the brand, left the company last year to become Ralph Lauren Corp.’s chief executive. Gap named company veteran Sonia Syngal to replace him.

The retailer, which in February reported its first annual sales decline since fiscal year 2011, has been adjusting its North American operations, closing stores and laying off workers. The Japan exit marks a reversal for the company, which earlier this year had planned to open additional Old Navy stores in the country.

For the quarter ended April 30, Gap reported a profit of $127 million, or 32 cents a share, down from $239 million, or 56 cents a share, a year earlier. Revenue fell 6% to $3.44 billion. The results were in line with the company’s downbeat guidance released earlier this month.

Maria Armental at maria.armental@wsj.com



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