Gap (NYSE: GPS) shares dropped on Tuesday after the company announced that CEO Sonia Syngal is departing the retailer.
Leadership Change at the Wrong Moment
Bob Martin, Gap’s current executive chairman of the board, will take over as interim president and CEO during the transition period.
“With an exceptional and industry-leading CEO for Old Navy now appointed, I am thankful to have the board’s support in stepping down, ushering in a new opportunity for fresh perspective and rejuvenated leadership to carry Gap Inc. forward,” Sonia Syngal said in a statement.
Gap also announced that Horacio “Haio” Barbeito, president and CEO of Walmart Canada, will succeed Old Navy’s former CEO Nancy Green, who stepped down in April.
In addition to the leadership change, Gap also offered negative commentary on the current trends in the retail industry. The company continues to be negatively impacted by mounting macro headwinds as Gap now expects sales to decline in the “approximately high single-digit range.”
Gap also added that higher promotional activity will weigh on its gross margin. Hence, Gap is now forecasting its adjusted operating margin percentage in the second quarter at zero to slightly negative.
The retailer reiterated its prior guidance that it expects to incur an estimated $50 million of costs during the quarter related to air freight expense and inflation.
How Did Gap Perform Earlier?
Syngal’s departure came right after the Q1 2022 report showed a decline in sales for the U.S. retailer.
Gap recorded a net loss of $162 million in the first quarter of 2022, a total opposite compared to the profit of $166 million during the same period of last year. Revenue also dropped by 13% to $3.48 billion, compared to last year’s $3.99 billion, just slightly ahead of the consensus estimate of $3.46 billion.
One of the main reasons for the decline in sales is supply chain-related problems and the underperformance of its Old Navy retail chain.
The combination of wrong sizes, styles that don’t fit customers’ needs, and bad timing for price-lowering promotions led to a significant drop in Old Navy sales. Old Navy’s target customers, the lower income consumers, are also feeling financial pressure due to inflation, which also contributed to underperforming sales numbers.
“Our hindsight is that maybe with the inclusive sizing launch, we had gotten away from really messaging, the core of what works for Old Navy, which is that value messaging,” CFO O’Connell told CNBC in May.
The Q1 report shows that Old Navy numbers fell 22% year over year, compared to other same-store sales such as Athleta, down by 7%, Gap down by 11%, and Banana Republic up by 27%. Gap’s online sales dropped by 17% and in-store sales also saw a 10% decrease compared to last year.
Gap shares previously slumped in April when the company warned about worsening trends that are impacting its business. The lowered guidance sent shares 18% lower in a single trading day.
What are Analysts Saying?
Gap shares fell sharply in April after the company indicated that its Old Navy unit is having a rough time. As a result, the CEO of the unit Nancy Green left the company.
“These are cautionary signs in our view, as slowing top-line momentum and Old Navy execution challenges are concerning,” Jefferies analyst Cory Tarlowe said.
Following yet another guidance, even those analysts that remained bullish earlier are now changing the tone as there are simply too many negatives around Gap.
On Tuesday, Wells Fargo analyst Ike Boruchow slashed the rating on Gap shares to Equal Weight from Overweight. Deutsche Bank analyst Gabriella Carbone followed the same path and cut the rating on Gap to Hold from Buy.
“We remain cautious on our space, we simply cannot continue to recommend a name that is juggling company-specific challenges on top of growing macro pressure. As the space is likely in just the early innings of fundamental decline, we simply need to rethink any fringe OW-rated names where our thesis is not reasonably intact,” Boruchow told clients in a note.
Summary
Gap stock price is trading down once again after the company announced CEO will leave the company while macro headwinds continue to negatively impact the business, which forced Gap to slash its full-year guidance once again
