Gap Among Struggling Retailers, Plans to Reduce Square Footage

On the heels of bankruptcy filings for Mervyn’s and Steve & Barry’s, as well as Walgreens’ scaling back of its expansion plans and Starbucks’ closing of 600 U.S. locations, Gap Inc. is the latest retailer to be hit by the struggling economy. The clothing chain plans to reduce its 40 million square feet across the country by 10 to 15 percent over the next three to five years.“Our second quarter total sales were $3.5 billion, down 5 percent versus last year. Given the volatile macro environment and recent economic indicators like housing and unemployment, which don’t seem to point to any improvement in the second half, we believe our short-term strategy is prudent,” said Sabrina Simmons, executive vice president & CFO for Gap Inc., in a second quarter conference call. The chain opened 55 stores and closed 52 stores this year and ended the quarter with 3,170 total stores. The number of new stores expected to open in 2008 has decreased by 15 stores to about 100 for the year, driven primarily by Banana Republic. Higher gas and food prices have caused many consumers to forego spending on non-essentials, according to The Outlook report prepared by Marcus & Millichap Real Estate Investment Services for May. This trend is evident when reviewing sales performance by retailer segment; drugstores and wholesale clubs are faring best, while declines among furniture, apparel and department stores are accelerating. Retailers focused solely on home furnishings and other non-necessities are struggling, with chains including Levitz, Sharper Image and Bombay Co. recently filing for bankruptcy, the report added. “The environment is still challenging. We don’t see any reason for any optimism in the back half of the year. We’re managing our business accordingly,” Glenn Murphy, Gap chairman & CEO, said in the conference call. “We’ve never had a clear real estate strategy for 3,100 plus stores in our 40 million square feet. That was one of the first observations that were made when new management came in and that work is now completed, Murphy said. “There’s always going to be some culling of stores that’s going to take place over the next number of months and years of under-performance. That’s always to going happen for any retail company.” Gap executives concluded that the company has more square footage per point of distribution than needed. “Real estate strategies are critical to any business like ours. We need to have a clear understanding of how our portfolio is going to be managed looking forward. But from our perspective, at 40 million square feet, (we are) looking at potential opportunity between 10 percent and 15 percent square footage reduction over the next three to five years,” Murphy said. Gap Inc. is one of the world’s largest specialty retailers, with more than 3,100 stores and fiscal 2007 revenues of $15.8 billion. The firm operates four store brands: Gap, Banana Republic, Old Navy and Piperlime.