Why Gap Stock Was Sliding Today

What happened

Shares of Gap Inc. (NYSE: GPS) were falling today after the casual apparel giant said that CEO Art Peck was stepping down. It also gave disappointing preliminary guidance for the third quarter. As a result, the stock was down 7% as of 1:08 p.m. EST.

So what

Peck's resignation wasn't much of a shock, since the retailer, which also owns Banana Republic and Old Navy, had limped along during his five-year tenure as CEO. Gap and Banana Republic have significantly underperformed and lost market share to fast-fashion competitors like H&M and Uniqlo. Over the last five years, Gap stock has fallen 57%.

Two designers with clothing laid out on the floor in front of them.

Image source: Gap.

Peck will be replaced by Chairman Robert Fisher, who will serve as interim CEO while the company searches for a permanent chief.

Gap's disappointing third-quarter numbers help explain why the board felt it was time for a change in leadership. Comparable sales were down 4% overall in the quarter and declined at all three major chains, falling 7% at Gap, 3% at Banana Republic, and 4% at Old Navy.

The company also said it expected adjusted earnings per share of $0.50 to $0.52 in the quarter, down from $0.69 a year ago and worse than analyst estimates at $0.55. It also slashed its adjusted EPS guidance for the full year from $2.05 to $2.15 down to $1.70 to $1.75.

Now what

Given the troublesome preliminary results from the quarter, today's sell-off doesn't come as a surprise. However, the timing of the transition is odd with the holiday season right around the corner and the company preparing to separate Old Navy. The biggest question in the aftermath of Peck's departure, then, is if the planned Old Navy spinoff will go through as expected. The discount brand had been the company's growth driver for several years, but even that has changed in recent quarters as Old Navy's comps have turned negative.

Management did not reference the spinoff in the announcement, only saying that it "will continue to focus on leveraging the power of our brands."

Investors should expect to hear more on that question when the company delivers its complete third-quarter report on Nov. 21.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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