- Gap Inc. reports that net sales for the five-week period ended October 1, 2016 decreased 2% to $1.43 billion from last year's net sales of $1.46 billion, according to a press release.
- The company suffered a devastating fire at its Fishklill, NY distribution center last month, forcing the company to shift fulfillment of 10% of its orders to other centers. This, in turn, led to a 3% net sales loss and a 5% loss for its Gap Global brand, a 3% loss for its Banana Republic Global brand, and 2% loss for its Old Navy Global brand. The company expects an additional 3% sales loss in October and comparable losses throughout the fourth quarter.
- But despite the losses, investors appeared to reward Gap for a stronger-than-expected performance in September, as shares rose 13% in pre-market trading following the announcement and have held steady since then. Reuters reports the spike was the biggest gain the company had seen since 2008.
Fires are always unexpected and unfortunate, but while they are one-off events the repercussions of large inventory losses and shifting logistics need can lead to long-standing losses for companies. Gap's fire took place Sept. 6, 2016, but the company stated it expected losses throughout the year.
The Fishkill warehouse held 30% of its inventory, so besides the inventory loss and property damage costs, the warehouse fire forced increased logistics cost to both transfer inventory and up the speed of distribution from other, more faraway sites.
Note, however, that a rise in logistics cost does not immediately correlate to a decrease in sales. Further distances and increased costs may have reduced the amount of on-hand inventory available, leading to a potential drop in sales, but absent of these factors the Gap and Banana Republic brands would still have recorded a 5% and 6% drop, respectively. Old Navy, on the other hand, would have seen a 6% growth.
So why are investors rewarding not-as-bad sales growth?
It's possible the unwilling reduction of inventory was a good thing for the company. The Fishkill distribution center stored mainly Gap and Banana Republic inventory, and a 36-month analysis of comparable sales for these brands shows the two have recorded only 4 months of flat or positive sales growth, combined. Meanwhile, Old Navy has recorded 28 months of flat or positive sales growth in the same period.
Certainly, the fire has caused many headaches for a company that was already struggling to renew growth, but one side effect of unexpected inventory loss is that they can also force the company to re-evaluate market and distribution strategies. Whether the lesson learned by Gap will be less reliance on lean supply chains, even less Gap and Banana Republic inventory, or something else altogether remains to be seen.
Meanwhile, other supply chain managers should take Gap's experience to reflect on the importance of transferability between warehouses. If one goes down, how accessible is the next available option?