Gap Inc. is fast turning into a tale of two hemispheres.
Asthe retailer struggles to get its mojo back in North America at themature store brands of Gap, Banana Republic and Old Navy, it sees onlinegrowth and multichannel expansion overseas as counterbalancing thenegative comparable-store sales Gap Inc. is experiencing in America.
GapInc. chairman and chief executive officer Glenn Murphy said Thursdaythat there’s “a big shift in the balance of the business,” wherebyinternational and online operations are seen generating 27 percent ofrevenues by 2013, versus 16 percent in 2007.
“It’s a full10-point swing,” Murphy said at Thursday’s investor update meeting inNew York.
“In a lot of countries in which we operate,particularly here in North America, it’s a market-share game,” he said.However, entering China, Southeast Asia or Russia, “there is a naturalgrowth…it’s a much different business when you are out there actuallytaking advantage of parts of the world where there is naturalhigh-single-digit growth or low-double-digit growth. It’s important tothe business to get a platform in markets where growth is going tohappen for many years to come. That’s critical to us.”
Anotherbig prediction came out of the meeting: a doubling of the onlinebusiness by 2014. “The real question is when, not if, we can get to $2billion in revenues and $500 million in operating income. It will be nolater than 2014,” said Toby Lenk, president, Gap Inc. Direct. “We aregoing to work very hard to do this as fast as possible.” Currently, GapInc. Direct generates just over $1 billion in revenues and about $250million in operating income. “We really think we are at a tipping pointto start to move the needle for Gap Inc.,” said Lenk.
At themeeting, Gap officials also said the Old Navy fleet is getting ready toset sail overseas. The chain could soon reveal its first locationsoutside North America. In addition, Old Navy is seen completing remodelsin 35 percent of its fleet by the end of 2011.
Other plans atthe $14.5 billion Gap Inc. include:
• Shifting the marketingspend for holiday to social media and apps and eliminating TV.
•Testing another Athleta store format.
• Bringing stores andonline shopping to China and Italy by the end of 2010.
• Bringingthe online platform to Japan in 2011, and taking market share fromUniqlo in Japan by opening Gap outlets.
• Doubling franchisedstores to 400 units by 2015, from 200 currently.
While upbeatabout the future online and overseas, there’s clearly unrest at home.
“Wewere not necessarily pleased with the performance of the business,particularly in the latter half of the second quarter. And we’recertainly not happy with the start we’ve gotten off to in terms of ourperformance in North America in the first two months of this newquarter,” Murphy said.
Gap managed to add to its woes last weekwhen it rolled out a new logo, and a few days later, after beingbombarded by criticism over the look, reverted to the old format. “Wetook the opportunity to launch a new logo on gap.com,” said MarkaHansen, Gap brand president. “It was amazing how many comments wereceived, the buzz we immediately received. There is a great deal ofpassion over that blue box. There may be a time for us to evolve the Gapbrand logo in the future.
“If and when that happens, customerswill be part of the conversation,” Hansen promised. Last time, theyweren’t.
As far as improvements to the top line, Murphy soundedcautious but sees improvement. “Between zero and 5 [percent] — that’sthe band of comps we want to get ourselves into. That allows us toproduce earnings that you saw in Q1.”
On the brighter side,Murphy characterized Gap’s European business, after being a drag onearnings for a long time, as currently a “strong contributor” and readyfor growth. He credited Stephen Sunnucks, president of Europe andinternational strategic alliances, for getting the operations “skinnieddown and refocused” and shaving costs. Currently, Gap’s onlineoperations generate the highest returns on capital, followed by outlets.But Murphy predicted: “The franchise business one day soon will be thehighest return on capital….We have to grow and compete globally.”
InJapan in the last 12 months, “we opened something like 15 outlets”where there are no regular Gaps and Uniqlo dominates. “It’s about timesome of these 786 Uniqlo stores got competition,” Murphy said.
Onanother overseas front, Banana Republic’s successful flagship openingon Regent Street “opened the door to a city street strategy inEurope….We intended to lead with Gap because its brand awareness is muchmore in Europe, but the white space for Banana Republic issignificant.”
He also said, “We have to start exploring Old Navyinternational. It’s only in North America. We don’t have anyannouncements today. The advance team has done quite a bit of work onOld Navy. There is a fairly large opportunity to take both Old Navy andoutlets international.
On the domestic front, Hansen at GapNorth America repeated many of the initiatives Gap executives haveoutlined ever since Murphy arrived on the scene. She once againacknowledged the need to “increase our relevance, drive frequency ofvisits, grow topline, have a laserlike focus on the Millennial targetcustomers without losing other customers, and offer ‘emotional’ productwith a modern, sexier aesthetic.” The store environments must be“aspirational,” and stores will continue to be downsized. Also, the flowof merchandise is being changed, with different products flowing intothe stores as the weeks go by, and becoming more gift-oriented as theholidays near.
The objective at Gap Adult is to move “ourproduct from a more casual offer to serving multiple occasions and withmuch more versatility, from working out to going out. American, modern,sexy, cool — that’s our aesthetic,” said Hansen. She also cited thebrand’s strategy of driving loyalty through bottoms as critical and thatdenim is the foundation of the Millennial’s wardrobe. “As of last year,we reestablished denim as the foundation of Gap’s product offering.”Fashion denim has been strong, while basic five-pocket denims have beensoft, she said. “We are working to make sure we dominate in denim.”
Gapwill not be doing television advertising for holiday, instead shiftingto a greater reliance on social media and mobile apps. “We will notanniversary television. It did not change the trajectory of Gap” lastyear, said Hansen.
At Banana Republic, Jack Calhoun, president,said, “Overall, Banana Republic is a very healthy, sound business,” andthe objective is for “moderate, consistent topline growth.” He said thebrand has found its niche — affordable luxury and modern, effortlessstyle with that touch of wit.” A year ago, the brand was too focused onworkwear. Now there’s a healthier balance between work, going out andweekend wear.
At the fast-growing Piperlime online brand, thepush is to widen the price spectrum, and for exclusive products fromvendors, Lenk added. Piperlime focuses on contemporary apparel andaccessories from both established brands such as Vince and emergingbrands such as Tucker. Also, more shipping options are being offered anda new fulfillment center will be operational next year in the secondquarter.
Athleta is also testing a small store in the SanFrancisco area, but early next year will open a “full prototype,” alsoin the San Francisco area. “Stores may be part of the brand’s future,”Lenk said.
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