By Evan Clark
with contributions from Vicki M. Young, David Moin
 on September 7, 2017

A new generation gap has opened up at Gap Inc.

Art Peck, president and chief executive officer, is ramping up “growth brands” Old Navy and Athleta while the beleaguered Gap and Banana Republic chains are being tagged as “mature.”

Peck told investors at Goldman Sachs’ 24th annual global retailing conference in New York Wednesday that the company will add a total of about 270 Old Navy and Athleta stores over the next three years while closing a combined 200 Gap and Banana Republic doors, largely in the specialty space. The 3,200-door retailer has also earmarked $750 million for digital investments over the next three years as it cuts $500 million in expenses “by better leveraging its size and scale, cross-brand synergies and streamlining operations and processes.”

The changes at Gap are something of a parable for fashion retail today. Big changes are in the offing across the industry, where quick turn value-driven styles, e-commerce and active are in and mall-based specialty stores are out.

Macy’s Inc. ceo Jeff Gennette was also at the Goldman conference talking about his company’s evolving structure and touting potential for the rest of the year. And PVH Corp. ceo Emanuel Chirico said “stronger players” such as Macy’s, Kohl’s and Nordstrom would gain share as the laggards go away or are absorbed.

“There’s too many stores in North America,” Chirico said, underscoring a point that’s been made across fashion for decades, but is only now leading to structural change in the industry.

Certainly, Peck sees the need for continued change at Gap.

The company has been turning away from the specialty space for some time and Peck noted that the retailer has closed 650 specialty stores since 2005, reducing square footage in the area by five million square feet. While that trend continues, Peck’s looking for the other businesses to pick up over the next few years. Old Navy’s annual sales are projected to grow to more than $10 billion, from just under $7 billion currently, while Athleta moves more than $1 billion from a small base when the business was acquired in 2008.

“Over the past two years, we’ve made significant progress evolving how we operate — starting with getting great product into the hands of our customers, more consistently and faster than ever before,” said Peck, laying out the plan in a release before the conference. “With much of this foundation in place, we’re now shifting our focus to growth. We will leverage our iconic brands and significant scale to deliver growth by shifting to where our customers are shopping — online, value and active.”

Peck told analysts: “We have scale and leverage, and we believe that can drive profitability and growth. This is an industry that is not historically rewarded scale and leverage. As we watch the industry, it is in the process of consolidating. Part of the consolidation push is the fact the scale and leverage matters, and we are partway through fully leveraging that, and we have a long way to go and a lot of opportunity in front of us.”

Much of that opportunity clearly lies in Old Navy, which Peck said was “the fastest-growing major apparel brand and monobrand inside the U.S. among major retailers, and we believe it has a tremendous amount of runway in front of it from a growth standpoint.” Old Navy’s comparable sales grew 5 percent in the second quarter.

But the firm has not turned its back on Gap and Banana, which the ceo acknowledged have been struggling with creative missteps that are now being corrected.

Peck said the company’s “mature brands are still profitable” and are being used for new initiatives, babyGap for instance has a subscription box service. “Banana’s been written off as not very relevant,” the ceo said. “It’s been [relevant] for us and can be a very profitable and excellent cash flow-generating business.”

And the Gap and Banana Republic store closures might not be as sharp are projected.

“We will work with our landlords to make sure that we’re doing everything we possibly can to maintain a presence, profitable presence, growing presence where it is appropriate, but there are places we are today that tend to be enclosed regional malls and some of the oldest places where the customer has moved on,” Peck said. “Oftentimes, it isn’t about the fact that the store is losing a massive amount of money or anything like that. It’s the customer has moved on, and we need to continue to move with the customer and meet them where they are.”

Also at the Goldman conference:

• Macy’s Gennett said, “When I look at the back half of the year, there are really a number of things that give us confidence.” He pointed to strong performances in fine jewelry and women’s shoes; stores picking up some of the volume from others that were recently closed; digital growth; upcoming marketing focused on product strengths and a new loyalty program; simplified pricing for shoppers, and the Backstage off-price concept inside existing Macy’s stores lifting the overall store with sharp values and some products not seen at Macy’s, before such as in home decor and kids’ shoes. “Any store that has a Backstage in it, the entire building is being lifted by over six points,” he said. By the end of the year, Macy’s will have 50 Backstage areas inside Macy’s stores.

PVH’s Chirico addressed the potential for more acquisitions. “Valuations are not cheap today, when I look at them. And uncertainty is higher than you’d like,” he said, adding that what’s available to purchase is limited at the current time. That means that a larger acquisition isn’t likely over the next 12 to 18 months. “Long term, I would like to make another acquisition,” he said, adding that PVH has the infrastructure in place, whether it is the strong platform in North America, Europe and Asia or the developing platforms in South and Latin America. “So acquisitions will continue to be a part of our strategy; it just doesn’t feel it right now given this environment,” he said.

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