Gap Inc.’s cash flow is strong and the international and online businesses are mushrooming, but the Gap brand continues to grapple with its floundering North American operations.

This story first appeared in the May 18, 2011 issue of WWD. Subscribe Today.

The imbalance was recognized by Gap Inc. chairman and chief executive officer Glenn Murphy at the firm’s annual meeting Tuesday, where he told shareholders: “In North America, we have to be more of a consistent performer, quarter in, quarter out. We haven’t been consistent enough. We need new categories, new customers, and we are changing the pipeline to be a lot faster, and to make better decisions,” in such areas as design and inventory management.

The objective, Murphy said, is to deliver “moderate, steady growth in our North American business” and reverse years of declining sales and traffic. Gap brand management shakeouts were seen on both the creative and operations sides. Among the recent departures, chief designer Patrick Robinson, who has not yet been replaced, and Marka Hansen, who was succeeded by Art Peck as president of Gap North America.

Gap also sees downsizing stores as part of the solution. “We need to continue to evolve our fleet,” Murphy said. “Since 2007, our square footage on existing stores is down 8 percent.”

He added, “We’ve got to find a better balance between our specialty branded channel and our value channel,” which is projected to go from a 4-to-1 ratio, to 3-to-1 over time. Gap Inc. defines its value channel as Old Navy and outlets.

But complicating matters this year are “sharply” escalating costs on goods, which Sabrina Simmons, executive vice president and chief financial officer, said will put “significant pressures on margins.” However, “We view these spikes in cost of goods as temporary.” Generally, retailers are expecting 10 to 15 percent increases in prices this fall.

With international and online sales on the rise, Gap executives put the emphasis on top-line sales growth, which Simmons described as the first priority. Murphy underscored the point, stating that international and online sales are seen growing to a minimum of 30 percent of the company’s revenues by 2013 versus 22 percent last year, representing, as Murphy said, “a very large strategic shift in our company.…One of the goals the company has is to be sharing American style around the world. We have a significant runway on the global stage.” He sees Gap operating 550 company-owned stores around the world in 2013, compared to the 354 as of last year, and taking the expansion in China to “the next level in 2012 and beyond.”

Other objectives cited by Murphy:

• Pumping up the Piperlime Web site by adding brands.

• Building up Athleta and capitalizing on the brand’s “unbelievable customer affinity.”

• Raising the number of franchises to 400 by 2014 or sooner. Gap has about 180 franchises in 24 countries and this week unveiled agreements for Serbia and the Ukraine.

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