In its struggle to turn around years of losses across its clothing brands, global retailer Gap Inc. is pulling back on its brick-and-mortar expansion plans for the rest of the year as it scrambles to cut potential expenses.
The San Francisco-based company will spend about $25 million less on expanding its real estate portfolio this year, reducing its capital expenditure expectations to $525 million, down from its earlier $550 million estimate. The reduced investment will result in fewer openings for its Old Navy and Athleta labels, long considered its "growth brands."
While the retailer reported improved margins and narrowed losses through the first quarter of the year, it hasn't been enough to make up for across-the-board declines across its labels, which could fall even further as the company tries to simplify its operational structure and recover from a series of mismanagement stumbles, interim CEO Bob Martin said.
"We understand that we have surfaced all of these issues before, and the work has been derailed for far too long," Martin told analysts on the company's earnings call Thursday. "We need to get back on a path toward delivering consistent results and improving our near-term execution. These are not one-and-done cost-cutting exercises. They're part of a mindset and cultural shift that will be part of our culture moving forward, and we'll continue to look at any additional opportunities to optimize our cost-cutting structure for the longer term."
As part of its corporate streamlining effort, the company last month laid off about 1,800 employees, more than three times the 500 positions it laid off in September last year. Combined, the two layoff rounds have cut roughly 25% of its headquarters roles as it looks to "reduce its management layers," Martin said.
Plan for Store Closings
The retailer — which owns brands including its namesake Gap label, Banana Republic, Old Navy and Athleta — reported a net loss of $18 million for the quarter ending April 29, a significant improvement compared to the $162 million it lost for the same period last year. 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.
"We have worked aggressively on our store fleet over the last three years," Chief Financial Officer Katrina O’Connell said on the earnings call. "Are we done? I don't know, but we're largely through the lion's share of the restructuring activity that had to be done. The balance of the remaining fleet is relatively healthy, so we have to stay focused on keeping that fleet healthy."
Gap Inc. closed 13 North America locations across all its brands in the first quarter, six of which were Banana Republic outposts. Its retail real estate footprint across the continent now spans about 2,410 locations that encompass nearly 30 million square feet, according to Securities and Exchange Commission filings.
The cost-cutting efforts' impact on the company's real estate portfolio will mean opening about 30 stores before the end of this year. Roughly one-third of those will be new Old Navy locations, and the remaining two-thirds for its athleisure label Athleta. That is down from the 35 locations the company had originally expected to open throughout 2023.
A majority of retailers across the country have bounced back from any pandemic-era dips as customers return to in-person shopping. Even though some shoppers are pulling back as a result of inflationary and recessionary concerns, the National Retail Federation estimates sales through the rest of this year will hit as much as $5.23 million, up 6% compared to last year.
Gap Inc., however, is a different story, said Neil Saunders, the managing director of analytics company GlobalData.
"While some of the decline can be chalked up to the ongoing closure of poorly performing stores, most is a consequence of Gap’s continued internal missteps and its failure to adapt to changing consumer tastes and circumstances," Saunders said in a statement to CoStar News. "As a hurricane of disruption rages around it, blowing away chunks of market share, Gap sits idly by hoping that all will be well. Despite management’s warm words about lasting change permeating the organization, we see very little tangible proof of fundamental adaptation."