By and  on January 14, 2011

SAN FRANCISCO — Gap Inc. may have opened its first Athleta flagship here, but it’s in no hurry to open more.

The caution could be wise, since Gap Inc.’s history with spin-offs has hardly been a bright spot. In 1987, it launched Hemisphere, a nine-store upscale concept that died two years later. In 2007, the retailer shuttered its 24-door misses’ concept Forth & Towne after it failed to generate acceptable sales in its first 18 months.

Gap acquired and developed Banana Republic and started Old Navy itself, and both have become household names. But both nameplates have struggled, according to Robert Buchanan, an instructor in the finance department of the John Cook School of Business at Saint Louis University and a former retail analyst at A.G. Edwards.

“Gap’s overall business has been disappointing,” he said, adding, though, that “the company as a whole clearly needs growth.”

The retailer clearly sees potential in the booming $31 billion U.S. women’s activewear market for Athleta, which, up until now, has focused on e-commerce and catalogues. The new store here on upper Fillmore Street in the well-heeled neighborhood of Pacific Heights has transformed a dark 5,000-square-foot Junior League charity shop into an open space inspired by rustic Northern California wine country, with high ceilings, exposed red brick, reclaimed wood trim and industrial metal fixtures.

“Certainly we think there’s potential for the new store to bring [the business] to the next level,” said Toby Lenk, president of Gap Inc. Direct. He described sales growth in the “double digits before and in the double digits” after Gap bought the online retailer in 2008 for $150 million.

However, company officials aren’t in a hurry to roll out a lot of stores, Lenk said, declining to estimate a potential number. “It’s really up to the customer. They’ve been asking us to open stores for a long time,” he said, noting that a test Athleta in a suburban mall near San Francisco showed that for every $1 spent online, customers bought another $4 in the store. Additionally, market surveys have shown only 50 percent awareness of the brand.

In May, WWD reported that Gap was rolling out Athleta test stores in Mill Valley, Calif., and in the San Francisco Bay area.

The overall $58.5 billion U.S. activewear market has been one of the bright spots in apparel sales in the sour economy, according to The NPD Group. The U.S. women’s sports togs and after-exercise apparel market is the strongest, comprising 57 percent of sales, while men’s is 31 percent and children’s, 16 percent. For the year ending November, women’s activewear sales increased 2 percent to $31 billion.

Although the niche isn’t broken out into segments, Lenk said the “vast majority” of women’s sports clothing is produced for the mass market. Athleta is hoping to appeal to this market with its attention to detail, such as hidden pockets for personal electronics; printed textiles, and after-exercise apparel like halter dresses with built-in bras ($89), shear hoodie dresses ($78) and black quilted miniskirts ($89).

Athleta faces a formidable competitor, however, in Lululemon Athletica Inc. With its premium price points, the successful yoga apparel and activewear brand handily beat Wall Street estimates last year. Earlier this week, Lululemon raised fourth-quarter guidance to between 55 cents and 57 cents a diluted share, up from between 46 cents and 48 cents. Analysts are looking for 49 cents.

According to Buchanan, what could benefit Athleta are its price points on staple items like yoga pants, which are generally lower than Lululemon’s prices.

“Lululemon sets a high pricing umbrella. It’s a bit like competing against Ralph Lauren,” he said, “But, like anything, it will come down to the product.”

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