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Gap Turns in Strong Q3and October—Can it Last?

Old Navy is winner of the third-quarter MVP award at Gap Inc. Retail analysts credit the division with driving an unexpected 20% year-over-year sales increase at the troubled retail company.

This week, Gap Inc. reported third-quarter same store sales were up 11% versus a 17% decline last year, representing significant improvement on a one-, two- and three-year basis for September and the company's best same store sales to date in 2002. Same store sales for the company were up a substantial 20% for October 2002.

Old Navy’s third quarter same store sales were up an impressive 24% versus an 18% decline last year, showing significant improvement on a two-year basis for September. Old Navy owes its success to an aggressive ad campaign versus none last year, says Thomas Wiesel Partners specialty retail analyst Anne-Marie Peterson in her report on Gap Inc.'s earnings announcement.

But traffic is still down at Gap, Old Navy and Banana Republic, and Peterson doesn't believe the sales revival will last long. "While the improvement in sales trends this month is clearly encouraging at Old Navy, we do not believe these trends are sustainable. Also, the overall comp on a two-year basis is still negative. Old Navy's improvements were driven by increased advertising spending, limiting flow-through of solid comps to the bottom line."

And a soft holiday season could also derail the turnaround, says Legg Mason analyst Holly Gustafson. "Progress at the company could be slowed if holiday sales are disappointing. The season is already hampered by having Thanksgiving five days later this year versus 2001. Gap has shown that it is clearly on the right track with its 'back-to-basics' strategy and successor for retiring CEO Mickey Drexler, but it still faces some challenges."

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