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A warehouse fire is good news...when you’re Gap

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Gap (GPS) hasn’t had it easy in recent years. Kids, teens and professionals have snubbed clothing from its brands, such as Gap and Banana Republic, in favor of hipper styles from H&M and other rivals.

To cap it off, the company suffered a fire at its Fishkill, New York, distribution center in August, which destroyed a 990,000-square-foot building that handled Gap and Banana Republic clothing. Last week, Gap blamed the fire for a 3 percentage point decline in September sales.

Ironically, the fire might just mark a turning point for Gap. At least one analyst points out a bright side to the destruction: The fire got rid of a lot of clothing no one wanted. 

Gap has been struggling to right its ship when it comes to creating attractive designs, as evidenced by a 10 percent and 9 percent decline, respectively, in last months’ same-store sales (those at stores open a year or more) at Gap and Banana Republic. In other words, think of the fire as cleaning house, the analyst noted.

“Given poor results at Gap and Banana Republic, likely attributable to unappealing merchandise assortments, we don’t view the product lost in the fire as an important loss but rather a fortuitous reduction in inventory,” wrote Stifel analyst Richard Jaffe in a research note last week.

He added, “Management indicated that the lost sales from the fire will be more than offset by higher maintained merchandise margin than originally anticipated, making a strong case for Gap to operate with significantly leaner inventories.”

Shares of Gap jumped about 15 percent on Friday to around $26.25, mostly because its sales weren’t as bad as some analysts had feared (they’re up another 18 cents in late Monday trading). They also looked favorably on the 4 percent increase in same-store sales for Old Navy, which is a bright spot among the Gap’s brands.

Still, the brand continues to face significant challenges, least among them rebuilding its warehouse. The company’s ad campaign for two years told consumers to “Dress Normal” just at a time when teens and millennials had no interest in appearing in clothing that wouldn’t make them stand out, as Bloomberg News noted in August.

Gap’s clothing aimed to appeal to everyone, but millennials and their younger cohort, Generation Z, increasingly viewed their fashions as “basic,” a term that connotes something that lacks differentiation and as a result veers into the realm of the boring.

“Uniformity is no longer ‘cool,’” one analyst wrote in a research note, according to Bloomberg.

To be sure, other formerly hot brands are running into similar troubles, ranging from Abercrombie & Fitch (ANF) to American Eagle (AEO). Aeropostale, a one-time high-flyer, entered into bankruptcy protection this year after failing to cater to teens’ new tastes.

As for Gap, its Old Navy product line is “both appealing and well-assorted,” Stifel’s Jaffe noted. The company is also cutting costs and closing underperforming stores. Will that push it back into financial health? Consumers might need more than that to come back through its doors, Jaffe noted.

Said Jaffe: “We recognize that this does nothing to improve the appeal or long-term success of the various Gap brands.”

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