Gap Inc’s Premium Brands Aren’t Moving Fast Enough
Gap Inc‘s (NYSE:GPS) premium brands, Gap and Banana Republic, have been struggling for a while now to keep up with changing consumer shopping behavior. Even in its August sales results, released earlier this month, the company’s namesake brand reported a -8% comparable sales change and Banana Republic reported -11% change. However, Gap Inc’s overall comparable sales fell just 2%, thanks to the significant positive contribution from Old Navy. While the retailer attributed much of the decline to currency exchange rate fluctuations and one week shift in Labor day, underlying weakness in premium brands cannot be ignored. [1] The significant decline in comparable sales for Gap and Banana Republic are indicative of a broader change in the industry that has troubled Gap Inc.
Buyers across the market are buying cheaper fashion-forward clothes more frequently, a trend that has been set into motion by fast fashion companies such as Zara, Forever 21 and H&M. These companies are beating a number of casual apparel companies on prices and they have been turning their inventory over at a much faster rate. As a result, they have become the primary shopping destination for a number of shoppers, who are now less frequently patronizing relatively expensive and less diverse brands such as Gap and Banana Republic.
Our price estimate for Gap Inc is $43, implying a significant premium to the market price.
See our complete analysis for Gap Inc.
The main factor that differentiates fast-fashion brands from the rest of the industry is their speed-to-market. Retailers such as Zara, Forever 21 and H&M have shortened their product development cycle to just a few weeks, while some years back the cycle for apparel players ranged from several months to even a year. H&M is adding new inventory to its stores almost every couple of days, and it has seen tremendous success with this strategy. It is no longer the era when apparel retailers were launching collections seasonally — spring, summer, back-to-school, fall, holiday and winter. To flourish in the present environment, retailers need something new in their stores and on their websites almost every week. This is why fast-fashion players are winning and Gap Inc’s premium brands lagging behind.
Gap Inc’s speed-to-market is not fast enough to ensure recurring purchases at its stores. Teenagers and young adults these days are frequently turning over their wardrobe, not wearing a particular piece of clothing more than a few times and buying cheaper clothing regularly. American consumers purchase about 68 clothing items and 7 pairs of shoes per person in a year. [2] This means that a person buys more than one item of clothing every week, which makes it evident why fast speed-to-market is imperative for apparel retailers. The reason why the casual apparel industry is struggling is not because the buyers have scaled back their spending on apparel, it is just that retailers (barring a few) are not moving fast enough. To build customer loyalty and ensure that a bulk of those 68 items are purchased from its stores and website, Gap and Banana Republic need to ensure that their inventory turns over quickly. For now, it is not happening.
However, CEO Art Peck believes that these brands are still strong enough to win customers back, if they are pushed in the right direction. He commented that the merchandising team has made significant progress on different facets of the brands and they are focused on implementing a new operating model to improve demand forecast and speed-to-market. Peck mentioned that Gap will have made significant progress by spring next year, which indicates that the company still needs some time to get designs and product development system right. Mr. Peck also said that the company is in the process of applying enhanced capabilities in fabric sourcing and more efficient vendor addition, which can have a positive impact on its speed-to-market. [3] Though Gap Inc is moving in the right direction, it needs to pick up the pace quickly, or else it will continue to lose out to its fast-fashion counterparts.
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Notes:- Gap Inc Reports August Sales Results, Gap Inc, Sep 3 2015 [↩]
- The shocking high cost of cheap fashion, Overdressed [↩]
- Gap Inc’s Q2 fiscal 2015 earnings transcript, Aug 20 2015 [↩]