Gap is a house on fire — and whether that fire gets put out in 2022 remains a large unknown.
"What Gap needs to figure out is who they need to be, how big they should be, and the big question for Gap is splitting apart Old Navy," BMO Capital Markets analyst Simeon Siegel said on Yahoo Finance Live. Siegel has a market perform rating on Gap with a $7 price target.
Investors are hoping some of those questions are answered later Thursday when the retailer reports its second quarter earnings. The Street largely is bracing for a disastrous earnings day following a shocking warning in early July.
Gap warned it expects sales for the second quarter to decline in the high-single digit percentage range. Operating margins are pegged to land somewhere between zero to slightly negative.
"They believe Old Navy is their perpetual piggybank that will always go up, and Gap is a business they can figure outBut Old Navy has probably peaked," Siegel said. "It doesn't mean it's turning into a bad business, you just need to figure out how big it should be. Gap, they should be more creative and introspective... in terms of figuring out how to raise the profile of the entire brand."
Figuring out the entire mess that is Gap will have to fall on someone new.
In July along with its ugly sales warning, the company fired CEO Sonia Syngal and said longtime board member Bob Martin will serve as interim CEO.
Syngal was seen as a potential savior for Gap when she took over as CEO in March 2020 from interim CEO and board member Robert Fisher, who in turn had stepped in for ousted chief executive Art Peck.
As the former CEO of Old Navy, Syngal was credited with reviving that important division and moved quickly in her early days as Gap's leader to inject a fashion sense back into the company. That included signing Kanye West to a pricey, long-term clothing design deal.
Syngal also worked to improve the company's supply chain and shutter underperforming stores.
Unfortunately for Syngal, her time at Gap will be remembered for more promise than delivery — a byproduct, in part, of Gap letting customers down on size and style.
The company further made a major error, experts say, by expanding too aggressively into plus-size clothing at Old Navy. The initiative didn't meet sales estimates, and now Old Navy is being forced to offer steep discounts to clear the excess goods.
West's collection, meanwhile, hasn't met expectations or hasn't driven meaningful sales.
And now with the economic slowdown weighing on apparel purchases, Gap has entered a new dark place that could wallop the stock once more.
"They are being affected, I think, by what every other big apparel chain is being affected by — too much stores, too much merchandising, too much sales, tons of competition," former Gap and J. Crew CEO Mickey Drexler said on Yahoo Finance Live. "You have got to have a niche, a point of view. What I would do is what I did the first day [there] in 1983. I went to every style in the company, throwing out, keeping in, and renaming everything."
Gap shares over the past year: down 63%.