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Gap Inc. is fast turning into a tale of two hemispheres.
This story first appeared in the October 15, 2010 issue of WWD. Subscribe Today.
As the retailer struggles to get its mojo back in North America at the mature store brands of Gap, Banana Republic and Old Navy, it sees online growth and multichannel expansion overseas as counterbalancing the negative comparable-store sales Gap Inc. is experiencing in America.
Gap Inc. chairman and chief executive officer Glenn Murphy said Thursday that there’s “a big shift in the balance of the business,” whereby international and online operations are seen generating 27 percent of revenues by 2013, versus 16 percent in 2007.
“It’s a full 10-point swing,” Murphy said at Thursday’s investor update meeting in New 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 natural growth…it’s a much different business when you are out there actually taking advantage of parts of the world where there is natural high-single-digit growth or low-double-digit growth. It’s important to the business to get a platform in markets where growth is going to happen for many years to come. That’s critical to us.”
Another big prediction came out of the meeting: a doubling of the online business by 2014. “The real question is when, not if, we can get to $2 billion in revenues and $500 million in operating income. It will be no later than 2014,” said Toby Lenk, president, Gap Inc. Direct. “We are going to work very hard to do this as fast as possible.” Currently, Gap Inc. Direct generates just over $1 billion in revenues and about $250 million in operating income. “We really think we are at a tipping point to start to move the needle for Gap Inc.,” said Lenk.
At the meeting, Gap officials also said the Old Navy fleet is getting ready to set sail overseas. The chain could soon reveal its first locations outside North America. In addition, Old Navy is seen completing remodels in 35 percent of its fleet by the end of 2011.
Other plans at the $14.5 billion Gap Inc. include:
• Shifting the marketing spend for holiday to social media and apps and eliminating TV.
• Testing another Athleta store format.
• Bringing stores and online shopping to China and Italy by the end of 2010.
• Bringing the online platform to Japan in 2011, and taking market share from Uniqlo in Japan by opening Gap outlets.
• Doubling franchised stores to 400 units by 2015, from 200 currently.
While upbeat about the future online and overseas, there’s clearly unrest at home.
“We were not necessarily pleased with the performance of the business, particularly in the latter half of the second quarter. And we’re certainly not happy with the start we’ve gotten off to in terms of our performance in North America in the first two months of this new quarter,” Murphy said.
Gap managed to add to its woes last week when it rolled out a new logo, and a few days later, after being bombarded by criticism over the look, reverted to the old format. “We took the opportunity to launch a new logo on gap.com,” said Marka Hansen, Gap brand president. “It was amazing how many comments we received, the buzz we immediately received. There is a great deal of passion over that blue box. There may be a time for us to evolve the Gap brand logo in the future.
“If and when that happens, customers will be part of the conversation,” Hansen promised. Last time, they weren’t.
As far as improvements to the top line, Murphy sounded cautious but sees improvement. “Between zero and 5 [percent] — that’s the band of comps we want to get ourselves into. That allows us to produce earnings that you saw in Q1.”
On the brighter side, Murphy characterized Gap’s European business, after being a drag on earnings for a long time, as currently a “strong contributor” and ready for growth. He credited Stephen Sunnucks, president of Europe and international strategic alliances, for getting the operations “skinnied down and refocused” and shaving costs. Currently, Gap’s online operations generate the highest returns on capital, followed by outlets. But Murphy predicted: “The franchise business one day soon will be the highest return on capital….We have to grow and compete globally.”
In Japan in the last 12 months, “we opened something like 15 outlets” where there are no regular Gaps and Uniqlo dominates. “It’s about time some of these 786 Uniqlo stores got competition,” Murphy said.
On another overseas front, Banana Republic’s successful flagship opening on Regent Street “opened the door to a city street strategy in Europe….We intended to lead with Gap because its brand awareness is much more in Europe, but the white space for Banana Republic is significant.”
He also said, “We have to start exploring Old Navy international. It’s only in North America. We don’t have any announcements today. The advance team has done quite a bit of work on Old Navy. There is a fairly large opportunity to take both Old Navy and outlets international.
On the domestic front, Hansen at Gap North America repeated many of the initiatives Gap executives have outlined ever since Murphy arrived on the scene. She once again acknowledged the need to “increase our relevance, drive frequency of visits, grow topline, have a laserlike focus on the Millennial target customers without losing other customers, and offer ‘emotional’ product with a modern, sexier aesthetic.” The store environments must be “aspirational,” and stores will continue to be downsized. Also, the flow of merchandise is being changed, with different products flowing into the stores as the weeks go by, and becoming more gift-oriented as the holidays near.
The objective at Gap Adult is to move “our product from a more casual offer to serving multiple occasions and with much more versatility, from working out to going out. American, modern, sexy, cool — that’s our aesthetic,” said Hansen. She also cited the brand’s strategy of driving loyalty through bottoms as critical and that denim 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 been soft, she said. “We are working to make sure we dominate in denim.”
Gap will not be doing television advertising for holiday, instead shifting to a greater reliance on social media and mobile apps. “We will not anniversary television. It did not change the trajectory of Gap” last year, said Hansen.
At Banana Republic, Jack Calhoun, president, said, “Overall, Banana Republic is a very healthy, sound business,” and the objective is for “moderate, consistent topline growth.” He said the brand has found its niche — affordable luxury and modern, effortless style with that touch of wit.” A year ago, the brand was too focused on workwear. Now there’s a healthier balance between work, going out and weekend wear.
At the fast-growing Piperlime online brand, the push is to widen the price spectrum, and for exclusive products from vendors, Lenk added. Piperlime focuses on contemporary apparel and accessories from both established brands such as Vince and emerging brands such as Tucker. Also, more shipping options are being offered and a new fulfillment center will be operational next year in the second quarter.
Athleta is also testing a small store in the San Francisco area, but early next year will open a “full prototype,” also in the San Francisco area. “Stores may be part of the brand’s future,” Lenk said.