Gap Needs to Come Up With a Better Story - The Wall Street Journal

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Gap’s reopened stores—55% have resumed operations so far—are recovering at a slow pace.
Photo: John Nacion/Zuma Press

By Jinjoo Lee

June 5, 2020 11:08 am ET

The Gap brand represents American optimism, its chief executive said on the retailer’s earnings call late Thursday. It could really use some right now.

Sales at Gap Inc., which shut all of its North American stores in mid-March, declined 43% in the quarter ended May 2 from a year earlier. That was 8.6% below analyst estimates and also worse than the 38% decline American Eagle Outfitters saw during the same period. Its shares declined by a relatively modest 0.5% in early trading on a strong day for stocks, perhaps reflecting how much bad news was already priced in.

Contrary to what the word pairing of retail and American optimism brings to mind, Gap’s call on Thursday mostly offered a story of moderation and survival. The company highlighted that it had addressed its cash burn, cutting 15% of its workforce—much of it at Gap, its flagship brand but also the laggard in the last couple of years.

It also furloughed some of its workers, deferred its dividend, cut capital expenditures in half to “recession-level lows” and bolstered liquidity. Its $2.25 billion debt raise in April, alongside cash preserving actions, bought the company at least two quarters of extra liquidity, according to RBC Capital Markets.

To conserve cash, the retailer also has skipped rent payments since April, though it still accrued them on the balance sheet for accounting purposes. Mall giant Simon Property Group sued Gap on Tuesday for failure to pay. While the lawsuit wasn’t mentioned in the call, the company said it was in “active and ongoing negotiations” with all of its landlords and could also just choose to shut some of its stores permanently—an effort that was already under way before the pandemic.

Its bright spot was online sales, which accounted for 25% of total revenue last year. Online revenue grew 40% in April compared with the previous year and by more than 100% in May. Reopened stores—55% have resumed operations so far—are recovering at a slow pace, seeing sales below 70% of their performance last year.