Goring Gap, & the Vanishing Middle Market, Part II

Earlier this week I used a new McKinsey study on the vanishing middle market to riff about the market schism, with aspirational prosumer piece at one end, and the commodity consumer stuff at the other — and Sears et al., getting squashed in the middle. Well, we have a nice example of how this phenomenon with a quintessential middle-market vendor being gored: Gap.

Analysts to Gap: ‘Time to get serious’
Plunge in profit prompts one analyst to call for breakup
By Jennifer Waters, MarketWatch
Last Update: 5:03 PM ET Nov. 18, 2005   
 
CHICAGO (MarketWatch) — Analysts chastised Gap Inc. management Friday, going as far as to suggest the company be broken up, a day after the apparel and retail giant turned in a sharply lower third-quarter profit and pulled down its full-year outlook as consumers continue to shun the retailer.

“[It's] time to get serious,” said Merrill Lynch analyst Mark Friedman. “It’s time to recognize who the customer really is, pay attention and win her back.”

Until then, Gap stock continues to suffer, tumbling nearly 10% in early trading with more than 11.3 million shares changing hands by late morning — almost three times its daily average. Shares hit an intraday low of $16.71, with analysts suggesting that they are likely to fall to October’s 31-month low of $15.90, before closing at $17.06, down almost 8%

Investors got out after the San Francisco-based company, which also operates Banana Republic and Old Navy stores, reported its worst quarterly sales and earnings results in more than three years. Another quarter of missing the fashion quotient — something analysts are now calling a structural problem — led to an eye-popping 20% plunge in profit to $212 million, or 24 cents a share, compared with year-ago income of $265 million or 28 cents a share.

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Comments

  1. Ben Hyde says:

    I’m suspicious that maybe more an example of how fickle fashion brands are, but …
    The I find more interesting that the pattern your poking at here sounds a to me like it might be just one of the family of patterns that are downwind from the ongoing shake out around the distribution of wealth. If larger and larger shares of the total economic activity are to be found in around the largest economic entities then a larger and larger share of the retailing will settle in there too. There has been no meaningful growth in the economic activity of entities in the bottom 70% of the economiy for the last two decades. That makes process innovation (for example consolidation, supply chain efficencies, moving production offshore) the only source of growth for firms in that sector. All of which just reenforce the skewing of the wealth distribution.
    But there is less and less room in the middle and the firms serving the low end are risky because their customers are so exposed to gusts of economic weather.