The San Francisco-based retailer says sales gained 3% in the third quarter, to $3.98 billion. Comparable-store sales rose just 1% compared to the 6% gain a year ago. And it cuts its marketing expenses for the quarter by 9%, spending $162 million.
In a conference call, Gap CEO Glenn Murphy says the decision was made based on reaction to the ads, which feature such rock offspring as Alexa Ray Joel. “If the third-quarter television investment for Gap was outstanding on a number of different metrics, we had the ability … to come out this holiday and put the money in place,” he said. “And I actually thought that television was quite good. We received a lot of positive comments, especially strong on social media. But as we looked at it, we just felt that we had a good plan in place. We had a better media mix.”
In the call, which was webcast and recorded by SeekingAlpha.com, Murphy says the company is continuing to evaluate TV's role for each of its brands. “Old Navy is a strong television advertiser, but they're seriously looking going forward at their media mix. Gap is not a regular user, from a medium perspective, of television, but it's an option for them. I think I've said before, even if Banana Republic had such a great idea, and TV was part of the mix that can make that idea come true and give voice to it and drive traffic and market share in gross margin dollars, we're not against it.”
The third-quarter ads marked the first time the Gap was back on TV in four years.
He also says the company continues to adjust the Athleta chain as it expands, broadening its appeal beyond its Northern California and New York sensibility. “It was a little too much for New Yorkers and some other urban markets. The challenge for us is not to give up on that,” he says, “opening up the brand aperture.” With plans to expand to 100 stores, “we're going to have to get a bigger tent.”
The results caused Sterne Agee to lower its estimate for the retailer. “Given the sharp deceleration of sales trends in the third quarter and the fact that November is probably off to a tough start, the top line is clearly lacking visibility,” writes analyst Ike Boruchow,“while an increasingly negative merchandise margin also signals deteriorating fundamentals.”
Murphy, however, is upbeat about the coming holiday, saying he believes that consumers will come out and shop this season: “And if we execute properly, then I would consider that to be a very positive Christmas.”