Lets Go Shop At Gap? Nah…

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What's going on?

Do you still shop at Gap? Exactly. The clothing retailers sales declined by 6% in March versus February worse than what investors were expecting. The stock price reacted by falling 14% on Friday.

What does this mean?

Declining sales are nothing new for Gap (which also owns Old Navy and Banana Republic): this slump has been going on for twelve months now. But Gap has been touting Spring as the season that it would turn things around (it recently implemented big new changes to its styles and was apparently counting on that paying off). Since it looks like its failing to do that, the shares were hit especially hard. One problem was, perhaps, the recent low temperatures: customers simply did not need to stock up on spring clothes. This also means that unsold goods will lead to higher inventory levels for Gap going forward, thus driving up costs (e.g. for storage) and probably forcing them to offer discounts to try to off-load the inventory.

Why should I care?

For the stock: Investors are getting tired of Gaps excuses. Usually, monthly changes in retail sales do not get this much attention. But for a year now, management has been promising a turnaround without results. The recent development also makes it likely that Gap will have to cut prices (not just to shift inventory but also just to attract shoppers) and that would weigh on future profits.

The bigger picture: Gap isnt the only one whos struggling. Competition from fast-retailers such as Zara and a shift to online shopping (e.g. Amazon) are putting pressure on traditional retailers. Sears, once the biggest retailer in the US, is also having trouble reinventing itself. Its getting help from none other than Bill Gates, whose investment firm contributed to a $500 million loan (the interest rate was quite high though, which means that Sears is paying a lot to borrow the money).

Originally posted as part of the Finimize daily email.

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