Gap Inc. needs to elevate profitability and get more consumers back in the habit of shopping the Gap, Old Navy and Banana Republic brands, but according to its chief executive officer, the company is “accelerating its transformation to be more agile and poised for long-term growth.”
So said Sonia Syngal, CEO of the San Francisco-based retailer, at the retailer’s annual meeting on Tuesday. “Following two years of transformation, we are now operating a more focused, core business,” Syngal said during the meeting, which lasted 12 minutes, saw no questions from shareholders and was held virtually.
Gap Inc.’s multiyear transformation has involved dramatically streamlining the Banana Republic and Gap store chains and efforts to sharpen the identities of both brands. The company has also shed marginal businesses such as Intermix and Piperlime, which only distracted efforts to bolster the nucleus of the business: Old Navy, Gap, Athleta and Banana Republic.
Syngal summarized last year’s “major strategic achievements,” citing the 21 percent year-over-year revenue gain and 2 percent increase over 2019; shedding unproductive sales; navigating acute supply chain disruption; growing online sales to $6.4 billion, which represents 39 percent of the total business; increasing loyalty program membership; restructuring debt at lower interest rates, and returning $400 million to shareholders through dividends and share repurchases.
She also noted that Old Navy crossed $9 billion in sales; Gap delivered two-year comparable sales growth in North America; Banana Republic’s “elevated brand positioning took hold reaching consumers,” and Athleta “led the conversation around female empowerment.”
“We took on key partners to increase brand access, new points of distribution and unlock new markets, from delivering Gap Home at Walmart to pushing the boundaries of fashion and design through Yeezy Gap, and debuting new lines with Simone Biles, Allyson Felix and Alicia Keys at Athleta.
“We also entered into agreements to transition our European business to market share leaders in France, Italy and the U.K., which provides us a more capital-efficient model to grow internationally,” Syngal said.
Last year, the company closed its 81 Gap stores and outlets in the U.K. and the Republic of Ireland, while continuing with e-commerce in Europe, and seeking third-party relationships to license stores. Last fall, a venture with Next Plc was formed to regrow the Gap business in the U.K. and Ireland.
During her presentation, Syngal also cited advancements across the corporation’s environmental, social and governance agency, including efforts to advance the financial welfare of workers at strategic suppliers and improve access to clean water and sanitation.
“Still, macro disruptions have shed light on some of the operational vulnerabilities where in our transformation roadmap we have lagged,” Syngal acknowledged.
That’s led the company to heighten efforts to become “a more creative, digitally led and resilient business by scaling the investments we have made in technology, integrating newly acquired artificial intelligence capabilities, and improving processes that both enhance product quality and increase speed-to-market while cutting costs and eliminating waste.”
The challenges and issues at Gap Inc. extend from supply chain bottlenecks and higher freight costs to declines at Gap and Banana Republic, and poor stock price performance. There have been a string of downgrades by financial institutions this year, though Morgan Stanley recently upgraded the stock to “equal weight” from “under weight” while underscoring the need for “significant transformation.”
Old Navy’s volume gains came at the expense of becoming increasingly promotional, and last month its CEO and president Nancy Green was let go. While the search for a successor continues, Syngal is running the business.
There’s further consolidation ahead, given the company’s multiyear program of closing Gap and Banana Republic stores in North America — 350 in total by January 2024 — was 70 percent complete at the end of the fourth quarter.
With the business hitting turbulent waters, and getting increasingly promotional, Gap Inc. has revised its first-quarter sales guidance downward to about low- to midteens year-over-year declines from its prior guidance of mid- to high-single-digit year-over-year declines. First-quarter results are scheduled to be reported on May 26.
On the positive side, Athleta continues to be the star performer in the portfolio and is on track to reach $2 billion in volume in 2023. There have been reports that shareholder activists are pressuring the Gap board to spin off Athleta to raise shareholder value. Some analysts believe Gap Inc. brands, if separated out, would yield more value to shareholders than Gap Inc. as it stands now.
Gap Inc., incurred a loss of $16 million in its fourth quarter but for the year had a profit of $256 million. Net sales for the fourth quarter increased 2 percent to $4.53 billion, from $4.42 billion in the year-ago period, and declined 3 percent from the fourth quarter in 2019. Comparable sales last quarter rose 3 percent, and 3 percent compared to the 2019 quarter.