Gap is trapped in a 'game of chicken' with American customers

Mallory Schlossberg/Business Insider

The apparel company reported yet another quarter of dismal results, for both the parent company and subsidiaries Banana Republic and Old Navy.

For the first quarter of fiscal 2016, Gap Inc.'s comparable sales were down 5%, compared to down 4% this time last year.

Gap Inc. CEO Art Peck said the company is still forced to resort to heavy promotion - to get people into stores and also to rid itself of inventory and fashion misfires that nobody wants.

"If we just think about promotion, I think it depends on the brand, because we're in very different positions on each brand," Peck said on an earnings call on Thursday.

Now, the company is feeling the burn as it tries to wean its customers off of the heavy discounting and promotions.

"Same is really true on Banana, where we have backed off [on promotions]," Peck said. "And I will be the first to say that when you start tightening up in promotion, you are playing a game of chicken with your customers ... And so we've been playing that now for really the last quarter. And we've seen more effects on this quite honestly."

Chicken is a game in which two cars speed towards each other and see who can go the longest without veering off and getting into a collision. Ultimately, it spells disaster.

"It will be easier in Gap, where we're seeing the numbers move more consistently in the right direction, a little more sporadic inside of Banana," Peck said.

Business Insider/Mallory Schlossberg

Inside a Banana Republic in February.

When we visited Banana Republic in February, we saw that lots of the clothes were on sale; in fact, in the Flatiron location near Business Insider's headquarters, there was nearly an entire room dedicated to discounted apparel. Some of the clothes relegated to the sale section seemed better suited for a Forever 21 than a store that's supposed to be selling "updated classics wth a twist," as Peck put it last fall.

But most importantly, promotions ran rampant on even in-season clothing. It begs the question: why bother to ever pay full price at Banana Republic?

And even though things looked better at Gap's namesake store, the brand is still resorting to very heavy discounts. In fact, in early April, the company had a promotion sign outside its Flatiron store, as though a sale was the only way it could get customers to come inside.

Mallory Schlossberg/Business Insider

It's indicative of a troubling trend in the retail industry; many other stores, like J. Crew and Nordstrom, have been forced to resort to heavy promotions and discounts. And sometimes, even promotions aren't enough to win over customers, as in Nordstrom's case.

"Everyone finds themselves in a tough environment, and they're doing what they can to stimulate sales," Nordstrom's president of merchandising, Peter Nordstrom, said on its earnings call last week. "And I think it just depends on your customer. For some, I guess that means price promotion is a lever that's going to really compel their customers. I think what you're hearing from us is that's not the most compelling lever for our customers. So what can we do about that?"

One bright spot in Gap Inc.'s business remains Athleta, the company's Lululemon competitor. The company doesn't disclose much information on it yet, but judging by Peck's comments, it appears to be doing well.

"So included in the other column is Piperlime, Intermix and Athleta," Peck said. "And Piperlime, we wound down in Q1 of last year, so the number looks a little bit funny because of the lack of Piperlime sales this year when we had them last year. If you remove that, we'd have a double-digit increase in other and that gives you a sense directionally since Athleta is much larger than Intermix. That gives you a sense directionally of that business."

The company has highlighted some strategies to fix its business on its earnings call. As a part of improving business, it will be closing up to 75 stores, though most of these closures will not be in the United States.