How Is Gap Inc. Going To Ensure Long Term Success?

by Trefis Team
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Gap Inc.
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Gap Inc.’s (NYSE:GPS) stock was buoyed by the news of the strategic initiatives the company is undertaking to ensure growth in the years to come. Gap will continue to focus on its growth brands, such as Hollister and Athleta, while closing down about 10% of its Gap and Banana Republic stores from “lower productivity” locations. This move follows from the decline in demand for the company’s more established brands, in favor of its younger chains. Gap, in general, has suffered from a decline in store traffic, a factor that has been plaguing many teen apparel companies, which are mostly located in struggling enclosed malls. The company will instead focus on areas where the customers are actually shopping- off-price locations and online.

Such a change in strategy is a tacit acknowledgment of the company’s inability to turn around the fortune’s of its namesake and Banana Republic brands. The former’s comparable sales have not increased in 14 quarters, while the latter has posted 10 straight quarters of falling comps, including a few double-digit declines. This poor performance has occurred regardless of the fact that the company has undertaken various initiatives to spur their growth, and has even closed down a number of underperforming stores. In the recently released second quarter earnings, while the company was able to surpass expectations, what should be kept in mind is that the expectation itself had been for a pretty dismal quarter.

Hollister And Athleta To Be The Key Focus Areas

Old Navy, on the other hand, has been a saving grace for the company. Being a lower-priced brand will stand them in good stead even in the future. While the brand hit $6.8 billion in sales in the last financial year, the company’s growth target of achieving $10 billion in revenues in the next few years may seem a bit ambitious. According to our estimates, Old Navy will reach almost $8 billion in revenues by 2024. The brand started its tremendous performance under the three year reign of Stefan Larsson, who stepped down from his position in 2015 to lead Ralph Lauren. Though the brand did falter a bit on his departure, it regained its footing subsequently, with Old Navy becoming the fastest growing apparel brand in the US.

Another key growth area for Gap in the future will be its activewear brand Athleta. The US activewear market is a $40 billion behemoth, with an 8% average annual growth rate, representing one of the highest growth areas in the apparel market. Gap’s Athleta brand is solely focused on this space, while the company provides athletic wear in its other segments as well. For the company as a whole, the athletic wear segment contributes over $1 billion in revenues, through Athleta and its other segments, and at the end of the second quarter of FY 2017, the company had garnered 3.5% share in this growing market, a 20 basis points improvement. The popularity of the company’s products will result in scale, and consequently improved margins. Athleta has grown at 25% every year since 2012, outpacing the growth in the overall athleisure market, and in the future, the company expects to attain revenues of $1 billion through this brand alone. This will be driven by growth in the online and mobile channels, as well as through market share improvement and store expansion.

Shift From Brick-And-Mortar To Online

The online and mobile business is the place to be these days, and Gap has ensured its presence is felt in the space. The company has one platform for all of its brands, ensuring customers can purchase items from any of them in one place. This has also ensured its new brands get the recognition that would not have been possible otherwise, if they had had a separate web presence. An upshot of this is that the company expects double-digit growth from its online channel this financial year. Gap has also rolled out features like Reserve in Store, Find in Store, Ship from Store, and Order in Store, and will be testing out Buy Online, Pick Up in Store in the third quarter. The company continues to accelerate its work in this space, with significant investment intended for areas such as direct fulfillment capacity, personalization, omni-channel services, artificial intelligence, and other data-driven customer experiences.

As mentioned earlier, the company is shifting its focus to areas where consumers are shopping these days. Keeping this in mind, over the next three years, the company expects to open 270 Old Navy, Athleta, and other value stores, while closing down about 200 underperforming Gap and Banana Republic stores. This reflects the desire of Gap to be present in its more profitable channels of online and value segments, while exiting from lower productivity, specialty locations. Through its initiatives of streamlining its operations, cross-brand synergies, and by better leveraging of its size and scale, the company expects to achieve expense savings of $500 million over the next three years. A portion of this will be reinvested in the growth areas detailed earlier, giving Gap an opportunity to improve its margins.

See our complete analysis for Gap Inc.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such 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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