The selling pressure in shares of Gap (GPS) may persist as investors and retail experts begin to question whether the retailer can keep clinging to life.
"I am not sure how they can survive," one Gap insider told Yahoo Finance.
Indeed, Gap is doing its part to feed that sad narrative.
On Monday, Gap said CEO Sonia Syngal would be stepping down after a "brief" transition period. Long-time board member Bob Martin will serve as interim CEO.
The source, who's familiar with the Gap board's thinking, said they were disappointed in Syngal's leadership of the business during the pandemic. Moreover, the source said, the board believed Syngal made several critical (more on those below) mistakes that may prove to have set the business back well into 2023.
Officially, the board wished Syngal well, with Martin saying in a prepared statement: "Most notably, amidst significant global disruption, social unrest and economic instability, Sonia had an immediate impact as Gap Inc. CEO, establishing a clear strategic direction and cultural identity that has united this global enterprise as a force for good with powerful brands poised to stand the test of time."
In the end, Gap will need to make changes ahead of the crucial holiday shopping season, the source said.
The retailer also 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. This marks the second straight material warning from Gap this year.
"Our work points to top-line weakness at Old Navy and core Gap pressuring the profit/loss statement with gross margins remaining under duress from promotions and external inflationary items (i.e., cotton, freight, and wages) leading to continued EBIT margin declines," said JPMorgan retail analyst Matt Boss in a new note to clients.
Boss reiterated an underweight (or sell equivalent) rating on Gap share shares with a $5 price target. The analyst's price target assumes about 38% downside risk from the stock's current trading level.
Things began reasonably well
Syngal was seen as a potential savior for Gap when she took over as CEO in March 2020 from interim CEO/board member Robert Fisher, who in turn, had stepped in for ousted chief executive Art Peck.
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 under-performing 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.
Meanwhile, West's collection never made the splash it was expected to, nor did it drive meaningful sales.
The onset of the COVID-19 pandemic plus the aforementioned errors did little to help Syngal's turnaround cause, concluding in a disastrous first quarter.
Gap said in late May first quarter sales at Old Navy and Gap plunged 19% and 11%, respectively, from the same quarter last year. The company offered up a full-year profit outlook about $1 below consensus estimates at the time.
The poor first quarter for Old Navy led to the abrupt exit of the brand's CEO, Nancy Green. On Monday, Gap named former CEO of Walmart Canada Horacio Barbeito to helm Old Navy.
Gap was trading around $8.30 per share on Friday afternoon.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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