Gap Announces Downsizing, FBR Analyst Agrees With Decision

Gap Inc (NYSE: GPS) announced in a press release after market close on Monday that it plans to close 175 of its specialty stores in North America over the next few years. The move is part of what company executives are calling a "strategic initiative to increase productivity and profitability."

The initiative will proceed quickly, as about 140 of the locations are slated to close in fiscal year 2015.

According to the release, the retailer will lose about $300 million in annual revenue as a result of the store closures. In addition, it will face approximately $150 million in one-time costs associated with the action. Gap estimates yearly savings of about $25 million after the stores are shuttered.

The firm also plans to streamline its headquarter operations by laying off approximately 250 employees, primarily in North America.

Gap will continue to operate about 800 locations in North America and 1,600 globally.

The company reaffirmed its guidance for fiscal year 2015 at $2.75 to $2.80.

Analyst Opinion

In a report published Tuesday, FBR & Co. analyst Susan Anderson reiterated a rating of Market Perform on Gap. Her assessment of the company's decision to trim its store fleet and workforce was generally positive.

She said that the store closures were sensible "given structural pressure, store productivity decline, the ongoing secular traffic downtrend, and the shift to e-commerce." Anderson believes that the move will aid Gap to stabilize its productivity over time and "better compete in an omni-channel world."

Furthermore, Anderson said the company's estimate of $25 million in savings per year is likely conservative. Shes notes an initiative launched in February by Chico's FAS, Inc. (NYSE: CHS) to lay off 240 employees and close 120 stores. The plan was projected to save the company $93 million annually—much more than Gap's projection despite substantially less downsizing. Additionally, while Gap execs project that the firm will see savings starting in 2016, she thinks that they could start flowing through as early as this year.

Anderson said that letting some headquarter employees go is a smart decision as well. She believes that the adjustment will make central operations more efficient by speeding decision making and increasing internal cohesiveness.

Yet although the downsizing may be a step in the right direction, Gap still has work to do in Anderson's opinion. Its main goals moving forward should be "to regain its core consumer, improve supply chain processes, and consistently produce on-trend product that can drive price acceptance at its targeted price point."

The market isn't showing a strong reaction to Gap's announcement, as shares were nearly unchanged Tuesday afternoon.