Global retailer Gap Inc. has a new CEO, growth outlook and strategy to revitalize its brands. When it comes to real estate plans, however, the San Francisco clothier remains steadfast: close more locations than it opens.
The company closed 40 locations across its company-owned retail portfolio through the first half of the year, outpacing the 36 it opened, most of which were focused on its popular athleisure brand, Athleta. The company is also in the final stages of putting some Gap and Banana Republic outposts on the chopping block as part of a restructuring plan to close 350 locations by 2023.
As it struggles to turn around years of losses across its clothing brands, the company said it would be prudent in its approach to future spending as it navigates concerns such as a pullback in consumer spending, the resumption of student loan payments and an uncertain economic outlook. Gap spent $13 million on restructuring related to termination costs and streamlining its executive organization, all to become more operationally efficient and reposition the iconic retailer.
While Gap Inc. reported improved margins and narrowed losses through the first quarter, it hasn't been enough to make up for across-the-board declines across its labels, including Banana Republic, Old Navy and its namesake brand. Sales are also expected to fall further through the rest of the year as the company warns of macroeconomic issues that could crimp its ability to turn around its slumping performance.
"We're pleased with our progress, but mindful of the mixed consumer economic backdrop," Chief Financial Officer Katrina O’Connell told analysts Thursday on the company's earnings call. "We will have to be prudent in our approach to planning through the rest of the year in light of what remains an uncertain macro economy and choppy consumer waters."
The retailer reported a profit of $117 million for the second quarter, a significant improvement compared to a loss of $49 million in the same period in 2022. However, sales fell to $3.55 billion from $3.86 billion over the same period, an 8% drop that marks Gap Inc.'s biggest decline in year-over-year sales.
'Firmly in Decline'
After riding a significant spending wave through the pandemic, retailers nationwide are now faced with consumers grappling with rising interest rates, inflationary concerns, widespread layoffs and fears of a potential recession. Retailers including Macy's, Foot Locker, Dick's Sporting Goods and Target show signs that customers are stressed from mounting economic pressures, potentially foreshadowing a pullback in capital expenditures and store opening plans.
The demand for space increased by 12 million square feet during the second quarter that ended June 30, according to CoStar data, and retail vacancy across the United States is below 5%, making it difficult for retailers to find space and increasing competition for high-quality, top-tier locations. Tenants signed on for about 56 million square feet of space in the second quarter, the lowest level recorded since 2020.
While some retailers have remained resilient in the face of any potential recession, companies like Gap that struggled even before the pandemic face an uphill battle to turn around their brand. Neil Saunders, the managing director of analytics company GlobalData, told CoStar News in a statement that the company is in a "dire state" faced with a mountain to climb in terms of rebuilding the business.
"Unfortunately for Gap, all its brands are now firmly in decline," Saunders said. "Even Athleta, which operates in a growing part of the market and should be doing much better, saw sales dip by 2.4% over last year. Not only does this position leave Gap without any engine to propel it forward, it also means that there are an awful lot of issues and problems to resolve across all parts of the business. This leaves management with something of a Gordian Knot to untangle."
Gap Inc. did not immediately respond to an emailed request for comment from CoStar News on Saunders' take.
The company's retail real estate footprint across the continent now spans about 2,592 company-owned locations that encompass about 30 million square feet, according to Securities and Exchange Commission filings.