Gap 1Q16 Earnings Call Notes

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The Gap’s (GPS) CEO Arthur Peck on Q1 2016 Results

Clearly we need to move faster

“over a year ago, I spoke to you very directly about the fact that we were not where we needed to be in terms of products, across our brands, and how we needed to bring product to market. And we have done a great deal of work across the company over the last 12 months-plus to be focused on product, focused on restoring the aesthetic of our brands, quality where is appropriate, consistent fit and a number of elements of product, including building responsive product capabilities. I am pleased with the work, it is the right work and we will scale this work progressively period-over-period as we go forward. But clearly, we need to do more, faster.”

When a business isn’t going to deliver you have to make tough decisions

“As part of this, we have announced that we will be winding down our Old Navy operations in Japan, partly due to the macro factors in that environment and partly due to, frankly, needing to apply the resources to greater and higher potential opportunities. I am obviously disappointed that we’re going to be discontinuing operations, but I view it as a sign of a good company, when you acknowledge that the business isn’t going to deliver, and you make changes and move forward.”

When you start tightening in promotion you are playing a game of chicken with your customers

” I will be the first to say that when you start tightening up in promotion, you are playing a game of chicken with your customers, and they try to way you out. And so we’ve been playing that now for really the last quarter. And we’ve seen more effects on this quite honestly. It will be easier in Gap, where we’re seeing the numbers move more consistently in the right direction, a little more sporadic inside of Banana. Maybe we have been promotional. We are promotional. We missed execution in Q1 from a marketing standpoint, and we are really tightening up the commercial messaging for Q2 and Q3, but we are going to continue to be promotional there.”

Traffic converts at a much lower rate on mobile than in store

“I think it’s really a question to place where we have had strength and we continue to have strength. And we see it obviously as everybody does, I think, a long-term progressive shift of the consumer moving in that direction. Let me go straight to mobile for a second, but let me do the, sort of, what I call the leaky bucket. If you think about business moving from stores to a desktop or laptop to mobile, stores for the industry, conversion of traffic into stores, whether its in the mid-20s to the high-30s or something like that; if you go down to a desktop or a laptop experience, where someone is buying, that traffic converts somewhere in the low-single digits for most people out there.”

Sabrina Simmons

We are operating in an evolving retail environment

“With regard to our earnings outlook for the remainder of the year, we are operating in an evolving apparel retail environment and it’s unclear whether the trends in Q1 will play forward for the remainder of the year. Therefore, we are not reaffirming our 2016 guidance.”

Our global growth strategy remains intact

“In closing, our global growth strategy remains intact. We are simply focusing our talents in capital on areas that have the greatest potential for profitability. After our actions, we will still have a presence in over 90 countries. While we’re disappointed with the results for the quarter, we’re energized about our plans to evolve our business and to capitalize on the competitive advantages we have.”