Trade Worries Put Fashion Flops in Harsher Light

(Bloomberg Opinion) -- It’s been a wipeout of an earnings season across the apparel sector, with dismal first-quarter results from Gap Inc. late Thursday serving as a coda to two weeks of largely downbeat news about the category. Several department stores and specialty chains saw shares hammered on their earnings results or less-than-sunny outlooks. And it was hard for them to blame any woes on a cautious consumer, given that big-box retailers such as Walmart Inc. and Target Corp. had strong results, and category specialists Best Buy Co. and Home Depot Inc. fared just fine.

So what happened? The threat of a new round of tariffs on imports from China that would include clothing was lobbed days before big retailers started to report results, making that issue top of mind for investors. Thus, whenever an apparel or department store reported disappointing results, investors were rightly wondering: If this is the best they can do before customers are facing higher price tags every time they go to the mall – and the grocery store, and the auto body shop, and many other places – how well will they possibly be able to perform under more difficult conditions?

And now, on Friday morning, the tariff backdrop looks to be even more unfavorable than when investors were initially digesting these retailer results. President Donald Trump said Thursday evening that he intends to slap tariffs on all goods coming in from Mexico, a cudgel he says he will use until undocumented immigrants cease crossing the U.S.’s southern border.  While grocers and restaurants who import fresh fruits and vegetables may end up being more directly affected by this batch of tariffs than apparel sellers, the policy change still matters a great deal for the mall stalwarts. If shoppers’ bank accounts are getting more depleted when they stock their refrigerators or order takeout, that’s less money they have for back-to-school clothes shopping or splurging on a new bikini for vacation. 

Of course, tariffs weren’t the only reason investors were spooked. We also saw a frustrating pattern among apparel and department store retailers this quarter, in which several whiffed on short-term tactical moves even while their long-term strategic plays looked sound.  

Nordstrom Inc., for example, has a smart plan to add small-format customer service centers to complement its cavernous department stores. But it suffered in the quarter in part because it eliminated its paper rewards notes, instead issuing them to customers online. Turns out, that sapped its stores of foot traffic.

Michael Kors parent Capri Holdings Ltd. wisely snapped up Versace and Jimmy Choo in a long-haul bid to transform itself into a diversified luxury powerhouse. But in the latest quarter, it hurt itself by not having enough inventory in its collection of core handbags.

And then there’s Gap Inc., where CEO Art Peck blamed an “extremely challenging” quarter on everything from unseasonable weather to merchandising mistakes. The namesake Gap chain was the worst of the lot, with comparable sales falling 10% from a year earlier. Banana Republic saw sales slip 3% from a year earlier by that measure, and even mighty Old Navy – the family-friendly chain that has been the company’s life raft –stumbled, notching a 1% comparable-sales drop.

Gap announced back in February that it’s planning to split itself in two in 2020, with Old Navy to become a stand-alone business and the rest of its portfolio to go on as separate entity. These latest poor results reinforce the company’s case for a breakup. Old Navy’s investment needs and growth opportunities are substantially different from Gap’s and Banana Republic’s at this point, and a separation ought to simplify strategic choices for management in a way that can help all the brands improve.

Nowhere is improvement more direly needed or overdue than at the Gap chain. It suffered last year from issues such as inventory hitting stores at the wrong time, and this quarter it said sales were muted thanks to cold, wet weather. But in addition to those recent woes, it has some long-brewing issues, too, that are causing it to slip into irrelevance. A recent consumer survey by UBS examined shoppers’ perceptions of Gap and other clothing brands. Among U.S. respondents, Gap compared favorably to its peers on pricing-related attributes.  But on key indicators of fashion and brand experience, it lagged the pack.

In other words, Gap – after years trying to regain its cool – is still struggling to be an of-the-moment place to shop. And while it is winning on discounts, that may turn out to be a pyrrhic victory.

Why should investors trust these companies to get major transformational initiatives right when they keep erring at the Retail 101-type stuff? Gap and the rest can and must do better, particularly if they want investors to believe that tariffs won’t completely derail their progress.

– “Border Wars” chart was contributed by Bloomberg Opinion’s Anjani Trivedi and David Fickling

That said, these results do not make a particularly compelling case for Art Peck to lead the new company that will include Gap and Banana Republic.

To contact the editor responsible for this story: Beth Williams at

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

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