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Gap: Staying Short


GPS' March sales numbers were awful, and it's now clear that Old Navy is following Gap brand and Banana Republic downward.

Traffic was the big problem, per the company - and how does that get fixed?

Recent optimism is set to reverse and then some - I still think GPS will trade below $20 this year.

I thought the market was very kind - too kind, in fact - to Gap Inc. (NYSE:GPS) after the company's Q4 earnings release in February. What seemed like disappointing FY16 (ending January 2017) guidance was met with a shrug, and in fact GPS' bull run simply accelerated:


That optimism seems wiped out after March sales results were released Thursday afternoon, with Gap Inc. as a whole posting a -6% comp decline. February results had shown some promise, with flat results from Gap brand and Old Navy leading to hopes that a bottom in those businesses might be on the horizon. (Banana Republic continues to post double-digit comp declines, but even GPS bulls likely have little hope for that brand at this point; additionally, BR sales were less than 17% of FY15 revenue, per the 10-K.)

Shares fell almost 9% in after-hours trading, after a 4% decline in the regular session; in total, GPS shares fell 12.5%. From here, that looks like just the beginning. The after-hours close above $25 still is ~15% above lows hit in January and February, and looking forward, there's a lot of reason to be pessimistic, even after Thursday's double-digit drop:

1. The assortment was supposed to be fixed.

As Fortune's Phil Wahba pointed out, Gap CEO Art Peck long had pointed to the 2016 spring collection as the point where assortment improvements would take hold, saying last year that this would the company's "no excuses moment". On the Q4 call, Peck passionately made similar points. Relative to struggling Banana Republic, Peck admitted that the company had gone astray. "We've diagnosed it, we've fixed it...I feel much more comfortable that we are on track as we get into spring, summer, and then fall this year," he said in his prepared remarks. Gap was supposed to be improved as well; Old Navy's struggles didn't really begin until Q4, so a potential rebound there may be a bit further off.

The March results call that optimism into question. Gap brand comps were down just 3% - but that was against a -7% print last year. BR now has seen double-digit same-store sales declines in eight of the last nine months (the outlier was a -9% figure in December). But what might be most...