Gap typically offers big discounts to entice shoppers to buy last season's designs, but the company cut back on promotions as it prioritized profit margins over sales in the latest reported quarter, leading to disappointing results at its main brand.
The Gap brand is expected to weigh on the company's gross margins in the current quarter as it works through its inventory issues, B. Riley FBR analyst Susan Anderson said.
Anderson, who cut her price target on the company's stock by $2 to $33, said she would remain on the sidelines until the brand showed consistent positive comparable sales.
Sales at Gap branded stores open for more than a year fell 5 percent in the fiscal second quarter, more than the 2.55 percent decline forecast by analysts, according to Thomson Reuters I/B/E/S.
Other analysts saw positives in strong performance at company's other key brands - Old Navy and Athleta.
In a note titled "Dear B.O.D. of GPS... Please Change Name of Company to Old Navy", Jefferies analyst Randal Konik said the company's better-than-expected profit and reaffirmed guidance show that the Gap brand does not matter as long as Old Navy remains solid and Athleta continues to grow.
The Gap brand posted its worst same store sales miss in three quarters. Analysts expect sales to fall in the current quarter as well, with an average estimate of a drop of 2.6 percent.
"We think Gap will continue to lose share to fast-fashion and off-price peers," Morningstar analyst Jaime Katz said, adding that the company had no clear execution on a plan to stave off losses in key segments.
(Reporting by Uday Sampath in Bengaluru)