Gap to Grow Outlets, Overseas, Cut Back in US

SAN FRANCISCO-Gap Inc., owner of the Gap, Old Navy and Banana Republic clothing chains will close 100 stores in fiscal 2009, mostly Gap-brand stores in the US, while opening 50 stores, 75% of them being either overseas or outlets. The company also will be looking for concessions from the owners of the buildings it occupies as it looks to lower overall costs while improving its stores, marketing and merchandising in order to recapture store traffic lost to rivals in recent years.

“We’ve had to offer more value to our customers in order to get them inside our stores. Our third party partners, like the vendors who make our clothes, also have had to tighten their belts [to help with that effort], and third party marketing and goods provides also have [done the same] to bring us more value,” chief executive Glenn Murphy told analysts. “We expect the same from the landlord community.”

In response to a follow-up question, Murphy said the owners of its buildings are aware that, in addition to the store closings, the company is trying not only to elevate stores’ presence with better locations and combination stores but also to shrink the size of some of its Old Navy stores. He did not, however, reveal how successful the company has been, or expects to be, in gaining concessions from building owners.

“There’s no such thing as a perfect time [for this] but landlords understand our strategy; we’ve been working on this for the last six months and we’ve been having good two-way dialogues.” Murphy said. “But at the end of the day our strategy is our strategy and it needs to be executed.”

In fiscal 2008, which ended Jan. 31, 2009, the company opened 84 new store locations, closed 102 stores and temporarily closed and repositioned 17 others. In the final three months of the fiscal year, the company opened nine stores and closed 50 stores.

Gap’s fourth quarter revenues fell 13% in the fourth quarter to $4.1 billion while same-store sales fell 14%. Same-stores sales at Old Navy, the company’s value chain, fell 17% in the quarter, while Banana Republic same-store sales fell 15% and Gap’s fell 13%.

Net income for the fourth quarter fell 8% to $243 million ($0.34 per share) from $265 million ($0.35 per share) in the same year-earlier period. The results were reportedly $0.02 per share above analysts’ average expectation.

For the fiscal year, net income was $967 million and net earnings per share were $1.34. Those numbers are up 16% and 28% respectively from $833 million and $1.05 per share in fiscal 2007.

“With nearly $2 billion in cash on hand and virtually no debt, we have a strong foundation that will allow our globally recognized brands to compete effectively this year as we navigate the current environment,” Murphy said. “Because we have taken tough steps over the past 18 months we are in a position to make some investment in our company.”

To that end, Murphy said every one of its brands will have a brand new store model in the ground and tested by the end of its third quarter. Two new concept Old Navy stores are already up and running in California, he said.

The company’s strategy in 2009 is to have even smaller, more geographically-oriented inventories and to drive traffic with marketing rather than sales. Inventory per square at the end of January was 6% below the same year-earlier period, itself a 15% decline from the year before that. In the first quarter of 2009 the company expects inventory per square foot will show a high-single-digit percentage decline from the first quarter of 2008, which was down 17% from the first quarter of 2007.

“Traffic, the lack thereof has been the Achilles Heel of our company for a number of years,” Murphy told analysts. “We don’t want to be a company where [marketing efforts] are based on moving through inventory rather than driving traffic. I’d like to think going forward that any investment we make in our gross margin is based on trying to drive in traffic, and that we can let the stores and our product do the job of moving through inventory.”

As part of an effort to drive traffic to its Old Navy stores — which the company says could have performed better given it’s the company’s lower-cost brand in a recessionary economy –- the company began a new advertising campaign that began with new television commercials on Thursday. Murphy says the key measure of success will be whether the company can draw back former customers while also gaining new ones.

“Time will be the judge,” he said. “But we know it’s the right thing to do.”