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Bitter Medicine

After reporting another lackluster month of sales in May, with same-store comparisons down 14 percent from a year ago, San Francisco-based Gap Inc. is taking a tough stance on its real estate portfolio. During the company's investor conference in June, Gap chairman and CEO Glenn Murphy announced that Gap will close some stores and downsize others in an attempt to reduce its square footage and cut operating costs. The measure comes after 15 consecutive quarters of sales declines.

Gap, once the envy of the apparel retail sector, has fallen out of fashion in recent years, in part as a result of increased competition from newer rivals, including Zara and H&M, and its own poor merchandising decisions, according to Emanuel Weintraub, president and CEO of Emanuel Weintraub Associates, Inc., an Englewood Cliffs, N.J.-based management consulting firm. Now that it's facing a marketwide slowdown in consumer spending, in addition to company-specific issues, its enormous store fleet is probably too big, he says. The company operates 1,155 Gap stores in the U.S., plus 529 Banana Republic units and 1,000 Old Navy locations.

“Their retail square footage is definitely oversaturated and that's been true for quite some time,” says Michael Appel, managing director of Quest Turnaround Advisors, a Purchase, N.Y.-based consulting firm. Appel notes, however, that although cutting the square footage is the right decision, downsizing existing stores might prove a challenge, since Gap will have to work out an agreement with its landlords about what to do with the vacant space. But though the measure might prove disruptive in the short term, according to Morningstar analyst Joseph Beaulieu, it seems like the right move for the company's long-term health.

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