Those were the two key themes of a daylong meeting held by Gap Inc. executives Thursday for Wall Street analysts as they tried hard to put a positive spin on the prospects for Gap, Old Navy and Banana Republic.
There were many mea culpas from a company that has disappointed investors with its slow progress. “We have been a little free in moving our brand positioning,” said Glenn Murphy, chairman and chief executive officer of Gap Inc. The “product aesthetic” has not had the level of consistency of great brands.
“We need continuity. We can no longer confuse our customers,” he said.
Murphy had global expansion on his mind as well as remodeling stores and “densifying” the product offering by adding GapBody and babyGap products to adult stores, realizing $1 billion in savings by paring down domestic square footage by 10 to 15 percent.
In terms of closings, he said just a few hundred stores would be involved, but that the bulk of the fleet would be downsized.
Gap’s new store design is on view at the Manhattan flagship on Fifth Avenue and 54th Street. According to Marka Hansen, president of Gap North America, sales trajectory at the flagship has gone up to where it completely justifies every dollar spent. “The fleet for the most part is so tired,” Murphy said. “We’re not just putting in new lighting and changing the fixtures. Anybody can do that.”
Gap’s remodel is about the brand’s positioning and ideas. This year, Gap completed about 50 remodels.
“We have a lot of work to do to bring our stores up to brand standards,” Hansen said.
On the marketing front, Gap is planning more emphasis on interactivity from print and outdoor advertising. There will be no TV for holiday, but TV hasn’t been ruled out after that. Gap will be partnering with more artists, celebrities and “influencers” to generate more interest in the stores.
Old Navy this fall is introducing two remodeled stores, its first redesign in 14 years. “It’s rare for somebody to wait that long to apply changes,” Murphy said. “It’s just a missed opportunity.”
Banana Republic will unveil a new store model next spring, and there will be a new design for outlet stores.
While Gap has made some progress in its laborious turnaround effort — second-quarter net earnings rose 51 percent due to improved margins and wide cost reductions — comp-store sales dropped 10 percent, a sign the $16 billion San Francisco-based chain still faces serious issues with product acceptance and store traffic. The company on Thursday reiterated that it expects fiscal year 2008 diluted earnings per share on a generally accepted accounting principle basis to be $1.30 to $1.35. Gap also reiterated it will deliver operating margins of about 10 percent and expects to generate about $1 billion in free cash flow for 2008. Gap releases third-quarter earnings on Nov. 20.
At the headquarters offices, he suggested there could be more changes in the head count, which began in 2007. “We have to be much more focused on exactly what is the productivity inside this office. We have brought in some great creative talent. We need more.” But there is also “the need to stabilize our workforce.”
The ceo stressed the need to drive traffic to the stores and convert them to shoppers, and said, “Pricing is really a huge missed opportunity for us. It could be a lot smarter, a lot more strategic. There is a lot of work for us on margin expansion.”
Old Navy will return to its value message by having a boutique within every store that sells items priced from $5 to $15. As the economy continues to slump, customers are more concerned with value, and Tom Wyatt, president of the division, said he sees a great opportunity for Old Navy. But with whispers the retailer may be headed into crisis mode, is it too late?
Wyatt’s short answer is no. “We are in the process of a turnaround,” he said, adding he expects the company to see some daylight starting in January. “It’s a journey.”
With the Banana Republic customer ranging in age from the 30s to 40s, Jack Calhoun, president, said he wants to expand upon that base by offering a broader range of services, such as tailors in select stores, a styling professional and perhaps even a concierge. Calhoun said such services would be tested in select stores first, and then maybe rolled out more broadly.
Calhoun defended the brand’s city style positioning, saying it’s an idealized version of life in the city. “You don’t have to live in the city. A city is not all New York City. It’s Kansas City and Miami. City doesn’t shrink our market. Nobody else in our space owns it and owns it well.”
Murphy said the company could reduce average costs by using its size to negotiate better prices from manufacturers. “We’re not happy when you look at the total units we buy from vendors,” he said. “We’ve been overpaying. As one of the biggest purveyors, we made the determination that we were overpaying. It came down to us realizing that maybe we didn’t have the competitive intelligence we should have, the processes we should have and maybe we were not the negotiators we should have been.”
He said Gap has consolidated some vendors.
The issue of undermerchandised stores was addressed during the meeting, with Murphy admitting, “We are much less merchandised inside the current square footage than we should be. Stores in Japan and Europe are much more densely merchandised.” Up to 15 percent of Gap’s domestic square footage “is not productive, not customer friendly and won’t be needed in the next three to five years,” Murphy said. “Of our 2009 priorities, the number one is driving traffic. We are keenly aware of our current productivity levels and they’re not acceptable.”
Taking Gap brands to new markets is high on the list of priorities. “We don’t have a single store south of Texas, in India, China, or east of France [all the way] to Turkey,” said Murphy. While Gap is launching stores in Greece and Moscow, “we see where H&M is going. We see what Zara has done. What Esprit has done.”
Franchising will play a big role in the international expansion. Art Peck, president of Gap Inc. Outlet and executive vice president of corporate strategy, said Gap has struck agreements with franchisees in Mexico, Egypt and Jordan, and “the family that covers Balkan nations. We have a lot of opportunity in Russia, Brazil and China.”
He added the franchised business model could be used to open units in Western Europe outside the U.K. and France.
Gap Direct plans to give a big push to Athleta, the women’s sport and athletic apparel brand it acquired in September. “Over time we’ll explore ways to leverage Athleta to other channels and geographies — that means stores,” said Toby Lenk, president of Gap Inc. Direct. “Athleta will provide us with differentiation. It will provide sizeable revenues.”
Lenk indicated that Gap Direct could acquire “other brands over time. We have a platform that gives us the ability to add more things. The division is also exploring international markets. In the U.K., we have Gap and Banana Republic [stores],” he said. “Now we can launch online in the U.K. and the same with Japan.”
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