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Gap (GPS) Declines on CEO Departure, Issues Muted Q2 View

·4 min read

Shares of The Gap Inc. GPS fell 5% at the close of the trading session on Jul 12. The stock’s dismal run on the bourses came after the exit of its president and chief executive officer (CEO), Sonia Syngal. In her brief stint as a CEO, she introduced inclusivity in the Old Navy brand, expanded curbside pickup service, launched the Yeezy line with Kanye West, and partnered with Walmart Inc. for a home decor brand and with other franchisees to run stores in Europe.

However, sluggishness in its Old Navy brand, which accounts for more than half of the company's sales, supply-chain disruption, inflation, social unrest and economic instability acted as deterrents. Speaking of Old Navy, too much of plus-size women’s apparel backfired due to an imbalance in size assortment. This led to a rise in inventory levels.

For the time being, the board has appointed the current executive chairman, Bob Martin, as the interim CEO. The company also announced that Horacio "Haio" Barbeito would serve as the president and CEO of Old Navy from Aug 1.

Prior to this, the retail industry witnessed a string of departures in the chief executive role.

Bed Bath & Beyond BBBY made significant changes in its senior leadership by appointing Sue Gove, an independent director of its board and chair of the board's strategy committee, as its interim CEO. The move comes after the exit of ex-president and CEO Mark Tritton.

Earlier, under Tritton’s leadership, the company undertook a transformation strategy to stay afloat. As part of it, BBBY divested its non-core assets, invested in technology, infrastructure and digital capabilities, and launched Owned Brands.

Under Armour’s UAA Patrik Frisk also stepped down as the president and CEO from June 1. Frisk will serve as an advisor through Sep 1 to support the transition process.

Until then, the company’s chief operating officer, Colin Browne, will act as the interim president and CEO.

The RealReal’s REAL founder and CEO, Julie Wainwright, also exited the firm after 11 years. REAL operates an online marketplace for consigned luxury goods. It offers resale product categories, including women's, men's, kids', jewelry and watches, as well as home and art products.

Currently, Rati Sahi Levesque, the company’s president and chief operating officer, as well as Robert Julian, its chief financial officer, are serving as co-interim CEOs.

Coming back to Gap, management issued a dull second-quarter fiscal 2022 view. The company continues to expect sales decline in the high-single digit range, in-line with its prior guidance. It anticipated transitory air freight expense of $50 million, inflationary costs on raw materials and freight to hurt margins in the said quarter. Also, increased promotional activity to attain assortment balance is likely to hurt gross margins. Adjusted operating margin is forecasted to be zero to slightly negative.

According to sources, there might be a possibility of the divestiture of one of Gap’s brands or a significant SG&A cost cut. Earlier, the company dismissed plans to spin off Old Navy in 2020 due to increased costs and complexity. Although its Banana Republic chain showed signs of recovery last quarter, it wasn’t enough to overcome the drab performance of the other divisions.

Gap is currently struggling to keep pace with the rapid shift from comfortable clothes to work attire as offices reopen due to late-arriving inventory stemming from global supply-chain issues. This has affected the company at a time when one of the biggest shopping times of the year, the back-to-school season, is nearby.


Zacks Investment Research
Zacks Investment Research

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We note that this Zacks Rank #5 (Strong Sell) stock has plunged 42.4% year to date compared with the industry’s decline of 26.5%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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