Does Gap Need A Change In Management Focus?

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As it continues to face a decline in sales every month for the past several months, Gap Inc (NYSE:GPS) seems to be struggling to turnaround. While the decline in October sales was primarily due to the negative impact of a fire in one of its distribution centres, the company still has a long road to recovery. Players such as Inditex (the company that owns fast fashion brand Zara) have overtaken Gap in terms of sales growth and market value in the last few years. We do not expect Gap to register any significant increase in revenues over our forecast period.

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Gap’s CEO Arthur Peck, who took charge of the ailing company in 2015, appears to be following a decentralized approach towards design and creativity. Reports suggest that Mr. Peck’s approach is to allow a creative ecosystem to exist and not encourage one creative voice to take the lead. Experts believe that too many viewpoints are diluting Gap’s products and making them more “commoditized”. This can lead to Gap losing its brand image and unique identity.

With the advent of fast fashion retailers, Gap faced two main challenges:   1) a slow production cycle leading to longer time to market; and, 2) Slower adaption to changing customer preferences.  The former has led to an inability to compete with Zara, which has been able to get fresh stock in stores every two weeks. The latter challenge has led to stocking products which were “out of vogue”. While the new CEO was expected to address these challenges, it appears that this is being done without a significant focus on design. Some products are being stamped out without approval from a head designer and there is increased focus on analytics and research data to monitor consumer tastes. While a data-based approach can ensure that the company quickly adapts to changing consumer preferences, the lack of creative focus can lead to an identity crisis for Gap. With all its brands now sharing product information, its speciality items are now getting commoditized.

A focus on quicker production cycles and changing consumer preferences is critical. However, Gap’s management also needs to ensure that its brand identity is maintained through a distinct creative process. The company also probably needs to work on faster approvals and less internal bureaucracy to ensure that it can take quicker decisions on products.  The company seems to be losing its brand appeal and an approach to create a distinct creative identity is essential for recovery.

Our forecast for Gap assumes steady revenues over our forecast period. However, if the company is not able to sustain its revenues and they decline by around 6-7% over our forecast period, there can be a 10% decline in our price estimate.Gap 1112162

Gap’s management is struggling to bring the company back to its past glory. Spring 2016 was expected to be the turnaround quarter for the company.  However, it failed to meet this objective. While the new CEO appears to be addressing the challenges faced by the company, a renewed focus on Gap’s brand identity and creative genius in accordance with consumer preferences will be critical for revival.
See our complete analysis for Gap Inc.

 

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