Gap Inc: Why Investors Shouldn’t Swear The Old Navy President’s Departure

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Gap Inc‘s (NYSE:GPS) stock fell 6% yesterday, hitting a new low of $28 as Old Navy president, Stefan Larsson, left the company to take over the CEO’s position at Ralph Lauren (NYSE:RL). [1] Stefan Larsson was instrumental in keeping the retailer’s Old Navy brand going in s challenging retail environment with fierce competition from fast fashion brands. In fact, his expertise in the field can be gauged from the fact that an outsider is being considerd to succeed namesake CEO Ralph Lauren, who was with his company for five decades. Investors have reacted negatively to this news since Old Navy’s consistent growth was the only bright spot in Gap Inc’s otherwise mediocre performance. However, we believe that they should not be too worried.

Leveraging his earlier experience and effectively replicating some of fast-fashion players’ strategies, Stefan Larsson was able to energize the brand, but his departure does not mean that his successor cannot build on the already implemented strategies. In fact, the new brand president just needs to ensure that Old Navy’s flexible manufacturing model, which has already set the precedent for Gap and Banana Republic, keeps running seamlessly. Stefan Larsson was undoubtedly a savior for Gap Inc, but it would not be wrong to say that his work there is done. At this point, his departure can be regarded as just a symbolic change, because the core of the brand remains intact.

Our price estimate for Gap Inc is at $43, implying a premium of about 40% to the current market price.

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Stefan Larsson Was The Backbone Of Old Navy’s Consistency 

Out of Gap Inc’s three brands, Old Navy has been the most consistent over the past few years. Gap and Banana Republic have suffered due to their premium pricing, a lack of fashion depth comparable to fast-fashion companies, and a relatively rigid manufacturing model that does not let them react efficiently to changing demand. On the other hand, Old Navy offered a better fashion variety, was relatively faster than its peers and even cheaper.

Stefan Larsson positioned the brand very well against its fast-fashion counterparts, while keeping a firm control over its prices. He leveraged his earlier experience at fast-fashion giant H&M to propel Old Navy’s growth by effectively employing strategies that have been crucial for fast-fashion players’ success. Stefan Larsson was with Old Navy for three years and during this time, the brand added close to $1.2 billion to the company’s annual sales.

Stefan Larsson employed a flexible manufacturing system for Old Navy, wherein certain products are launched in small batches to test demand, before beginning the mass production. By gauging the response, the management is able to forecast demand properly and release an appropriate production order to vendors and suppliers, who are always kept in the loop to ensure a faster time to market. Suppliers maintain a stockpile of fabric and posses the ability to quickly accommodate new trends that emerge in the fashion market. [2] The main aim of this system is to respond quickly to changing fashion and it has worked very well for Old Navy so far.

Why His Departure Isn’t The Worst Thing

In the present retail scenario, almost all the companies know what is the “mantra” for fast-fashion brands’ success. However, only a few brands have been able to replicate their pricing and merchandising strategies, and Old Navy is one of them. Under Stefan Larsson’s leadership, the management has successfully developed and implemented a flexible manufacturing system and now, it just needs to be followed consistently. Stefan Larsson was the face of change for Old Navy, but the design and merchandising team, and other executives involved in overturning Old Navy’s strategies are still there. Yes, a lot of ideas and initiatives would have come from Stefan Larsson himself, but now they just need to be followed. In fact, even Gap and Banana Republic have taken cue from Old Navy’s success and the management believes that they will show some positive results next year. We believe that whosoever succeeds Larsson just needs to ensure that existing system is only bettered, and Old Navy can maintain its growth momentum even without Stefan Larsson.

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Notes:
  1. Gap Inc. Announces Old Navy President Stefan Larsson to Depart Company, Gap Inc, Sept 29 2015 []
  2. Why Gap investors are worried, in one chart, Fortune, Sept 30 2015 []