Gap (US) to Close 21% of U.S. Stores, Triple China Store Base
18 Oct 2011 - Gap Inc. plans to shut more than a fifth of its Gap stores in North America over the next two years, a comedown for the struggling retailer and a stark symbol of the way the tepid recovery and rise of online shopping have altered the landscape at shopping malls.
Once the world's largest specialty apparel chain by revenue, Gap pioneered the strategy of developing a popular store and expanding it to every viable shopping location in the U.S.?then beginning the process all over again with a new brand.
But that approach, which produced heady growth as Gap and other retailers raced to build a coast-to-coast presence, came back to haunt it after the recession exposed an oversaturated market, with far more stores than shoppers to fill them.
Acknowledging that mismatch, Gap, which also owns the Old Navy and Banana Republic chains, said Thursday it will shrink its network of Gap stores in North America to 700 by the end of 2013, down 189, or 21%, from the 889 stores open at the end of June. The company has been paring back its North American store count over the past few years, but hadn't previously disclosed it planned such deep cuts so quickly.
Gap will let existing leases expire, rather than terminate them early, a spokeswoman said. She wouldn't say where the closures would take place, but the company said they will be aimed at clearing out stores that have become tired or worn out. The pullback will empty two million square feet of retail space, creating a fresh headache for U.S. mall landlords, who are already struggling with record vacancies. The retailer, meanwhile, will continue to expand in countries like China, joining the U.S. auto industry, consumer-products makers and technology heavyweights in staking its fortunes on untapped markets overseas. "This is not a condemnation of our home country, but we are making a prediction that it's slow growth here," Gap Chief Executive Glenn Murphy told investors Thursday. Gap's struggles in the U.S. market have been largely of its own making. The company's merchandising team consistently has failed to come up with compelling styles and was late to some lucrative trends like premium jeans. Mr. Murphy shook up the unit's leadership in February and replaced its top designer, Patrick Robinson, in May, but his moves have yet to bear fruit. The company's first-half profit this year fell 21% from a year earlier to $422 million. "We're not happy with our performance in the first half of 2011," Mr. Murphy said. Some of Gap's problems are industrywide. Retailers entered the recession with too many stores and were forced to abandon plans for more openings as consumers cut back spending. Many have since found it difficult to get sales growing again without adding new stores, said John Long, a retail strategist at consulting firm Kurt Salmon. One place consumers are spending is online. Many retailers, including some with stagnant brick-and-mortar sales, are seeing double-digit growth in e-commerce. "Retailers were overstored before we headed into the downturn," said Edward Yruma, a senior apparel and retail analyst at Keybanc Capital Markets. "Given the way consumers are spending, coupled with the fact more are going online, we just need fewer stores." Gap stores are ubiquitous in U.S. shopping malls, and the planned closings comes at a bad time for mall owners, who are already weathering competition from online shopping sites and vacancies left from the bankruptcies of retailers such as Borders Inc., Linens 'n Things and Circuit City Stores Inc. Market researcher Reis Inc. reported last week that regional mall vacancies rose to 9.4% in the third quarter from 9.3% in the second, a record since it began publishing the data in 2000.
Gap's Old Navy, Banana Republic and Gap stores collectively rank among the largest tenants of most leading U.S. mall owners. The country's biggest mall landlords, Simon Property Group Inc., counts Gap as its largest tenant other than department stores. Gap's 353 stores in Simon's malls account for 3.1% of its base rents, according to Simon's filings with the Securities and Exchange Commission. Similarly, Gap is the largest small-shop tenant in General Growth Properties Inc.'s malls, accounting for 2.9% of the GGP's base rents. It is the fourth-largest small-shop tenant of CBL & Associates Properties Inc., accounting for 2.2% of rents. Mall operators have been bracing themselves for further Gap closings for months. One consolation: Gap outlets tend to be located in higher-quality malls and high-traffic areas. The retailer's clout in the past has enabled it to get these prime locations at relatively low rents. Landlords might find they can lease those storefronts to other retailers willing to pay higher rates, said Greg Maloney, president and CEO of broker Jones Lang LaSalle's Americas retail division. But the chances of filling the Gap's vacated space will hinge on an improvement in the overall economy, namely better retail sales and job growth in the coming months and years. "If [the economy] stays where it is, I don't think it will be absorbed right away," Mr. Maloney said. "It will take some time until we see positive news." While Gap is closing full-price Gap stores, it plans to add 50 Gap outlet stores that sell clothes at deeper discounts.
And while U.S. growth remains anemic, Gap has been investing heavily to expand its brand internationally in countries like China and Italy. On Thursday, Mr. Murphy identified China as the company's biggest opportunity, but admitted working in the country has been a challenge. "It's not easy," he said. "We're going to make mistakes." The company's international sales grew 16% in the first half of the year, largely due to the pace of new store openings. Sales at international stores open at least a year fell 5%. The problem again was style. Stephen Sunnucks, Gap's president of international, said comparable-store sales fell because of the chain's shortcomings in women's apparel, which was too basic and not enough on trend. "I needed to keep people focused on the product side," said Mr. Murphy, who had no apparel experience when he took the CEO job at Gap four years ago. The executive has won praise for improving operations and instilling a sense of urgency at Gap.