Old Navy Drives Sales Growth Of Gap Inc.

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Gap Inc. (NYSE:GPS) reported its fourth quarter and fiscal year 2016 results on February 23, 2017, wherein the company reported a comparable sales increase of 2%. This has been the first period of sales growth since CEO Art Peck took over the helm two years ago. The company also expects the comparable sales to be flat or up slightly in 2017, reversing its recent trend of sales declines, raising hopes that a turnaround may finally be in the cards for the Gap.

Gap Q4 2016 Earnings- 1

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Significant Changes Helping In The Turnaround

The company has undertaken a number of changes to turn the corner, some significant, and others quick fixes. These include addressing the quality, the aesthetic, the value and the fit, in order to improve the product lines. Among the moves that required a lot of work, the most noteworthy has been the work on the lead time. According to Peck, the average development cycle for the industry has been 10 months. Gap has done the work to bring it down for many of its programs and categories to 8 to 10 weeks, with a third of its products having the capability to be produced within the quarter. This will enable the company to better compete with fast fashion retailers, such as H&M and Zara, who are known for their quick turn-around times.

This factor has also ensured that the company can manage the inventory more efficiently. An example of this is that the company can now keep more fabric at hand, platforming approximately 60% of the fabric needs, which permits them to cut and sew garments immediately at the release of a purchase order. The company has also increased the testing of the product, through either crowd-sourcing or physically testing the product in the stores, to be better informed about the buying commitments. Particularly in the Gap brand, the company has moved to a demand-based buying model, with one platform across all inventory, pricing, assortment building, and in-season management. This same program is set to be implemented across the whole company. This not only helps to bring the right product in the right place at the right time, but also helps the cost structure.

Old Navy Leads The Sales Growth

Old Navy reported its fifth consecutive year of sales growth, with a business that is approaching $7 billion in sales. While tough traffic trends existed during the year, the company managed to overcome that with the help of a strong commercial plan, impressive marketing, and better product acceptance. The brand, being more pocket-friendly than Gap’s other brands, has been the one driving the company’s sales growth, and the company intends to continue investing in it and building that business.

Gap Q4 2016 Earnings- 2

While the progress at Gap has been slower than expected, there have been some improvements in key places in the business, with a number of initiatives implemented, such as those highlighted earlier in the article. However, Banana Republic’s performance has been plaguing the company. While steps have been taking to improve the performance, the results have not been positive. This also prompted the announcement on January 25 of the departure of Andi Owen, global brand president of Banana Republic, who will be leaving the company in late February. Many consumers are not willing to pay the higher price points charged by the brand. Steps such as reducing the store count, or even shuttering of the business may make more sense for the company.

BR Comps Till FY 2016

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Gap Inc.
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