Today was the day for retailers to report their same-store sales numbers from March and the news wasn't good at all for most retailers. Which retailer stood out with the single worst performance of all in March? That would most certainly be Gap Inc. (NYSE:GPS). Gap reported same-store sales that fell 18%, far worse than the expected 7.7% decline. It seems that just as many on Wall Street were starting to believe the Gap turnaround story, the company has fallen flat on its face. 
The number one culprit was its Old Navy stores, which saw sales plummet by an astounding 27% in March. What kind of reasons did the company give for this awful performance from the month of March? A Gap spokesman said that the company had put too much emphasis on the women's assortment. The company also said that because of improved margins they expect to be able to meet previous EPS expectations for the fiscal year 2008.
Gap's new CEO Glen Murphy has decided to take the company in a direction where they rely far less on discounting and much more on selling at full price for good profit margins. It certainly is possible that this is part of the reason for the large downside surprise from the company, but it seems hard to believe that is the only cause. The company reported that 17% fewer customers shopped at their stores in March than did in February. In my view, while short-term profit margins may look nice, this isn't a long-term winning strategy. Why would a customer who sees discounts at a rival teen retailer overpay at Gap or Old Navy? They might for a while, but I'd count on several customers getting wiser and avoiding Gap Inc. stores.
Yes, Easter was early this year and many retailers had a hard time meeting expectations, so Gap Inc. can't be counted out based on one bad month, but it better get the trend turned around soon. The Gap and its other brands need to differentiate themselves in some way from their competitors, and I don't think the way to do that is by marking up prices and hoping profit margins keep the company afloat.
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