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Gap has a big new problem on its hands

Brian Sozzi

As if dying Gap (GPS) needs another problem, it’s now finding out that shuttering stores en masse to protect its dwindling profits is not as easy as previously envisioned.

“Our discussions with landlords around closures continue to be challenging,” conceded Gap CFO Teri List-Stoll on an earnings call with analysts Thursday evening. List-Stoll — who is taking on more responsibility in the wake of ousted underperforming Gap CEO Art Peck two weeks ago — all but pleaded with landlords on the call to be more cooperative.

“Given the challenges associated with our specialty fleet, we simply must continue to rationalize those stores that don't generate sufficient returns to warrant the investments necessary to provide our customers with a differentiated experience. However really to execute on our strategy as quickly and decisively as we would have liked will continue to be a challenge,” List-Stoll added.

With sales under pressure for years, Gap has been pitching Wall Street on store closures as a means to drive better earnings. In March, Gap said it would shutter 230 specialty stores over the next two years, mostly weighted toward the Gap and Banana Republic brand. But progress on those closures, to List-Stoll’s point, has been brutally slow. Through the third quarter, the company has only closed 44 total Gap and Banana Republic stores in North America.

At quarter end, the company has 1,281 Gap and Banana Republic stores in North America. The company still operates a gargantuan portfolio of real estate: 3,938 stores globally.

Stubborn landlords

One industry insider tells Yahoo Finance that Gap is having issues getting rent relief from mall owners or approval to shrink the size of large, underperforming stores. That makes sense given the current state of America’s malls — seemingly all retailers are shuttering stores due to the shift to online shopping, and landlords are doing what they can to protect their own bottom lines.

The mall vacancy rate hit an eight-year high in the third quarter, according to real estate research firm Reis.

“We have acknowledged with our fleet restructuring program, that we still have too many stores that are oversized, not performing the way we need them to perform, maybe in locations that are no longer on the path that aren’t driving the profitability that we need,” List-Stoll explained. “And so it's critical that we get our store face down to the appropriate number of stores with the appropriate level of profitability is where we actually have the ability to invest in the stores.”

HONG KONG, CHINA - 2019/08/30: American clothing and accessories retailer brand GAP store and logo seen in Hong Kong. (Photo by Budrul Chukrut/SOPA Images/LightRocket via Getty Images)
HONG KONG, CHINA - 2019/08/30: American clothing and accessories retailer brand GAP store and logo seen in Hong Kong. (Photo by Budrul Chukrut/SOPA Images/LightRocket via Getty Images)

Ultimately, List-Stoll’s comments signal to Wall Street that the store closure campaign unveiled in March may not be ambitious enough. And even if a more ambitious store closure plan is revealed after the holidays, the ability to execute on it quickly may not be possible because of stubborn landlords.

And that’s a major problem for Gap at this critical juncture with sales and profits under severe pressure. It’s either aggressively shrink the store base or Gap could enter a death spiral of plunging profits and cash flow.

None of this will help Gap attract a new CEO. We wish them well in the search.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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