Gap Closing Stores, Potentially Laying Off Thousands

The company estimates roughly $300 million in annualized sales losses associated with the store closures.
Katie Kuehner-HebertJune 16, 2015

Retailer Gap Monday announced that it plans to close about 175 stores in North America and some stores in Europe over the next few years to boost profitability, with about 140 closures this year.

It did not disclose how many employees in total would be laid off, but the San Francisco-based retailer did say it would reduce its workforce at its headquarters, primarily in North America, by about 250 this year.

The cuts will allow Gap to focus on offering “consistent, on-brand product collections and enhancing the customer experience across all of our channels, including a smaller, more vibrant fleet of stores,” the company’s global president Jeff Kirwan said in a press release. “These decisions are very difficult, knowing they will affect a number of our valued employees, but we are confident they are necessary to help create a winning future for our employees, our customers, and our shareholders.”

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Gap chief executive Art Peck said that returning the company to profitability has been his top priority since his appointment four months ago.

“Customers are rapidly changing how they shop today, and these moves will help get Gap back to where we know it deserves to be in the eyes of consumers,” Peck said.

The company estimates roughly $300 million in annualized sales losses associated with the store closures. Additionally, the company estimates one-time costs will range from $140 million to $160 million, of which about $55 million to $75 million is non-cash.

These costs are expected to be recognized primarily in the second quarter and will include lease buyouts; asset impairments primarily related to the Gap fleet; inventory and fabric write-offs; and employee-related costs associated with organizational changes.

The company estimates annualized savings from these actions to be roughly $25 million, beginning in 2016.

Excluding the estimated pre-tax costs of $140 million to $160 million, or approximately 21 cents to 24 cents per diluted share, the company is reaffirming its guidance for fiscal year 2015 to be in the range of $2.75 to $2.80.

A Reuters story said that “a series of fashion misses” have caused shoppers to pass over Gap for “fast fashion rivals” such as H&M, Inditex’s Zara, and Forever 21.

“Management is trying to control the exposure to the Gap brand until they can have some compelling product to really (rejuvenate) the top line and profitability,” Mizuho Securities analyst Betty Chen told Reuters, noting the company’s “prudence” in trying to eliminate the store footprint.

As of Jan. 31, Gap had about 141,000 full- and part-time employees in about 3,700 company-owned and franchise stores worldwide, according to Reuters.