It’s not as if Old Navy has to batten down its hatches.
Old Navy has long been Gap Inc.’s largest-volume brand and cash cow, so it was a bit of a surprise when first-quarter results revealed less-than-satisfactory sales results at the brand, traced back to some fashion misses.
“Overall results for Old Navy were primarily impacted by the women’s dress business, wherein, reviewing the season, we did not execute as effectively, and as a result, customers did not respond to our assortment the way we had intended,” Richard Dickson, Gap Inc.’s president and chief executive officer, said during a conference call with industry analysts and investors Thursday afternoon, following the release of the retailer’s first-quarter results.
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“Entering Q2, the seasonal women’s dress business continues to underperform our expectations, with weakness visible across the broader seasonal product assortment as well,” Dickson said. Swim and shorts were also under-performers.
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“The team has worked swiftly to address these factors, refocusing our efforts on sharper price points and stronger customer messaging to drive conversion for the seasonal categories,” Dickson said. “Once these changes began to take hold in mid-May, we saw some improvement, but we are carefully monitoring this and making continued adjustments. While we are encouraged by the recent improvement, we also recognize that this level of performance does not reflect our full potential. There is a clear opportunity to do better, and we are working closely with the team to sharpen our focus and strengthen execution.”
Old Navy generated first-quarter sales of $2 billion, up 1 percent compared with last year’s quarter, on a total and comparable basis.
Dickson outlined several ways to put Old Navy back on course.
Old Navy is rolling beauty out to the full store fleet by yearend, following what Dickson termed was a successful winter pilot at 150 stores. It is also launching a “first-of-its-kind” partnership with Fanatics, a major sports licensing company. A new format capitalizing on activewear, Old Navy Sport, is also in the works.
Meanwhile, the retailer will continue to drive its active, denim, kids and baby categories, all of which posted growth versus last year, mitigating some of the shortfall in other categories, but not as much as Gap Inc. would have liked.
Collaborations — like the brand’s hook-ups with Paris Hilton, Zac Posen, Disney, Christopher John Rogers and “The Devil Wears Prada” movie — also remain key to the strategy.
In early May, Gap Inc. hired Michael Francis, the marketing maestro at Target during that retailer’s heyday, to the newly created role of chief customer officer for Old Navy. His mission, Dickson said, is to “help sharpen our customer strategy, deepen emotional connection with our audiences, and bring even greater cohesion and consistency to how we show up across every touchpoint and every season.” Francis also serves as head of the marketing shared services group, also a new position at Gap Inc., whereby he oversees media strategy and execution to “help drive greater integration and effectiveness across the company’s portfolio of brands,” which includes Gap, Banana Republic, and Athleta as well as Old Navy.
Old Navy, a family and value-oriented fashion retailer selling T-shirts and tank tops for around $7 to $10, button-down shirts for $15, and jeans from $17 to $29.99, attracts primarily a low- to middle-income cohort, which is being squeezed by higher fuel and food prices. Asked if macro economic conditions impacted Old Navy last quarter, Dickson said: “We are not seeing this as a consumer issue. We actually see consistency and strength in our customer behavior. We are winning with all income cohorts, growth across low-, middle- and high-income customers.” With Old Navy, “We just did not have the right fashion and value equation.”
The company did lower its forecast for sales for the year to a 1 to 2 percent increase from previously projecting a 2 to 3 percent increase, reflecting the situation at Old Navy. For the second quarter of this year, Old Navy’s comparable sales are expected to be down in the low single digits. Higher promotions to clear seasonal products are also expected.
One analyst on the call asked if Old Navy would correct its product issues by back-to-school, to which Dickson said that: “In [the second half] seasonal categories will be behind us, and I’m very confident in our ability to drive improvement. We’ve got some great, exciting new strategic category news with back-to-school programming, we’re emphasizing active and denim, which are winning categories for us. We’re investing in categories we believe our customers will respond to…As we look at the overall Old Navy business, [the first half] will be challenged with the seasonal weakness, and then as we move forward in H2, we expect continued improvement.”
Despite some tougher times at Old Navy, Gap Inc. continues to generate solid results overall, with Gap, Banana Republic and Old Navy contributing gains, while Athleta is in rebuilding mode. “The fundamentals of our business remain strong and the rigor we’ve instilled throughout the organization are enabling continued margin expansion, growing cash flow and increased returns to shareholders this year,” Dickson said.