Gap (GPS)

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Revision as of 19:53, July 21, 2009

Table of Contents

Intro and Overview

Introduction

Business Overview

Trends and Forces

Key Trends and Forces

Competition

The Gap, Inc. is a clothing retailer based in the United States, operating 3,200 retail stores under three distinct apparel brand names – "Gap", "Old Navy", and "Banana Republic." More than 2,800 of these stores are in the U.S., and Gap also has over 300 store locations overseas in the UK, Canada, France, and Japan.^[1] In fiscal 2007 Gap's net sales fell 1% to $15.8 billion as same store sales decreased 4% on the year.^[2] Gap's sales peaked at $16.6 billion in 2004 and have been decreasing annually since then.^[3]

These declining sales numbers have sparked a turnaround process for the Gap as it focuses on cutting costs, choosing to hold less merchandise in the stores rather than maintaining traditional inventory levels and marking it down to turnover merchandise. Inventory per square foot declined 17% during the first quarter of fiscal 2008, as net profit increased nearly 40% despite a 4.6% decrease in net sales and an 11% decrease in comparable store sales.^[4] Tight inventory management and lack of markdowns allowed Gap's gross and operating margin in the quarter to increase to 39.6% and 12.1% from 38.2% and 9.2%, respectively.^[5]

The retail industry has exhibited mixed results in the face of a major downturn in the U.S. economy spurred by the subprime lending crisis in the summer of 2007 and record high oil prices. Overall consumer spending has declined, particularly on non-necessity fashionable apparel and accessories, which are the types of goods Gap's stores sell. As a result of the poor outlook for the U.S. economy the company increased its plans for store closings from 100 to 115, to match its planned store openings of 115, yielding a net change of zero locations for the year.^[6] In the long-term two potential sources for growth include further expansion abroad and online, as international and online sales grew 12.7% and 21% in the first quarter of 2008, respectively.^[7]

Business Overview

Gap Inc. is one of the largest companies in the apparel retail market with 3,149 store locations (as of FY08) and over $14.5 billion in annual sales. Despite its size and position as one of the largest apparel retailers in the U.S., Gap has been struggling since 2004, reporting negative same store sales growth in 2005-2008 (of -5%, -7% and -4% and -12% in each consecutive year respectively) as net sales have fallen every year since they peaked at $16.2 billion in 2004 to $14.5 billion in 2008. Despite falling sales, Gap has been able to maintain relatively healthy gross and operating margin figures, 37.5% and 10.7% in 2008, by managing inventory levels and staying away from merchandise markdowns and promotional selling activities that inflate operating costs at the expense of profit margins.

The Gap has two reportable segments: Retail and Direct. The retail segment covers The Gap, Old Navy and Banana Republic brick-and-mortar stores. The direct segment covers the online businesses of Gap, Old Navy and Banana Republic, in addition to Piperlime (an online shoe retailer) and Athleta, a sportswear brand.

Retail (93% of FY 2008 Sales)

The Gap Brands

Gap has three distinct brands, each with its own target market and unique challenges. Banana Republic offers higher-priced clothing, Old Navy offers lower-priced clothing, and Gap falls in between. In 2008, Old Navy accounted for 39% of sales, with Gap responsible for 41% and Banana Republic accounting for 18%.

Gap Stores

The Gap brand's main focus is casual attire targeted at consumers between the ages of 18 and 25. Additionally, The Gap has stores utilizing the Gap brand which target narrower segments of the retail apparel industry, including GapKids, babyGap, and gapbody.

The Gap has the largest footprint of the three brands both in the US and internationally, operating 1,193 stores in North America and 286 stores internationally as of January 2009. Net sales for the Gap brand decreased by 5% during 2008 and same store sales at the Gap decreased 8% in 2008.

Old Navy

Targeting a value-conscious consumer, Old Navy offers lower-priced basics. Its primary consumer is either a “trade-up” customer who normally shops at a similarly priced apparel retailer like Wal-Mart, Target, or Kohl’s, or a “trade-down” customer looking for value basics and fashion. Like The Gap, Old Navy stores sell children's and infant clothing in addition to adult-sized clothing.

The Old Navy brand operates 1,065 stores in North America as of May 2008.^[8] Old Navy's net sales fell 2.4% in 2007^[9] while the brand's same store sales fell 4% in the first quarter of 2008.^[10] Old Navy faltered in the last few years because management attempted to sophisticate the merchandise at Old Navy, which hurt profitability and strayed from the target customer's demands. The brand is now re-focusing on delivering apparel and accessories for the whole family at compelling values.

Banana Republic

Deemed The Gap Inc.’s "affordable luxury" brand, Banana Republic was acquired in 1983. Its target market is the 25-35 age group. Banana Republic specializes in higher-end clothing and basics, carrying suits, personal care, and intimates.

Of Gap's three store-based brands, Banana Republic is the smallest in terms of number of locations, with only 584 total stores, 559 in North America, 24 in Asia and 1 in Europe.^[11] Also, while sales at Gap and Old Navy fell in 2007, Banana Republic's sales grew nearly 7% during the year^[12]. However, out of all of Gap's operations Banana Republic has been hit the hardest by the downturn in the U.S. economy which started in late 2007, with same store sales falling 18% in the first quarter of 2008^[13] as shoppers turned away from the higher prices of Banana Republic's merchandise.

Other Brands

Forth & Towne was launched in late 2005 with a target market of women between the ages of 35 and 45. However, after investing $40 million in the venture, the company abandoned the project in February 2007, citing low long-term returns on the investment and a more immediate need to focus on revitalizing its Gap and Old Navy brands.

Piperlime, a growing concept launched in late 2006, is Gap's attempt to use its experiences with the online retail operations of its three brands in order to enter a business that none of its three stores focus on: footwear. Piperlime is an online-only operation that sells designer shoes. Piperlime is largely separate from the rest of Gap, with its own team and deadlines. A key challenge for the company will be developing this venture in a profitable way--a particularly challenging goal in the super-competitive market for designer shoes. Piperlime has seen positive growth in 2008, helping to fuel 21% growth in Gap's online sales during the first quarter of 2008.^[14] (Read more about Gap's key trends and forces...)

Intro and Overview | Trends and Forces | Competition

References

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 == Business Overview ==
-Gap Inc. is one of the largest companies in the apparel [[retail]] market with 3,149 store locations (as of FY08) and over $14.5 billion in annual sales. Despite its size and position as one of the largest apparel [[retail|retailers]] in the U.S., Gap has been struggling since 2004, reporting negative same store sales growth in 2005-2008 (of -5%, -7% and -4% and -12% in each consecutive year respectively) as net sales have fallen every year since they peaked at $16.2 billion in 2004 to $14.5 billion in 2008. Despite falling sales, Gap has been able to maintain relatively healthy gross and operating margin figures, 37.5% and 10.7% in 2008, by managing inventory levels and staying away from merchandise markdowns and promotional selling activities that inflate operating costs at the expense of profit margins. In 2008 and 2009 the Gap started to follow the same strategies used by similar retailers such as H&M and [[Target (TGT)]]--that of limited editions. In 2008 the Gap had a limited edition of T-shirts and accessories produced in collaboration with Pantone, the world-renowned authority on color and provider of color systems. The company has also made agreements with high-profile designers to produce exclusive collections for the retailer, such as Stella McCartney and Alexander Wang. Through these limited-run endeavors, especially designer collaborations, the company hopes to spur excitement in the stores and entice customers to spend money. By their very nature, limited-edition lines only exist for a short amount of time, therefore consumers do not have the option to hold off on buying them until their financial situation improves.
+Gap Inc. is one of the largest companies in the apparel [[retail]] market with 3,149 store locations (as of FY08) and over $14.5 billion in annual sales. Despite its size and position as one of the largest apparel [[retail|retailers]] in the U.S., Gap has been struggling since 2004, reporting negative same store sales growth in 2005-2008 (of -5%, -7% and -4% and -12% in each consecutive year respectively) as net sales have fallen every year since they peaked at $16.2 billion in 2004 to $14.5 billion in 2008. Despite falling sales, Gap has been able to maintain relatively healthy gross and operating margin figures, 37.5% and 10.7% in 2008, by managing inventory levels and staying away from merchandise markdowns and promotional selling activities that inflate operating costs at the expense of profit margins.
 The Gap has two reportable segments: Retail and Direct. The retail segment covers The Gap, Old Navy and Banana Republic brick-and-mortar stores. The direct segment covers the online businesses of Gap, Old Navy and Banana Republic, in addition to Piperlime (an online shoe retailer) and Athleta, a sportswear brand.
 ====Acquisition of Athleta====
 On September 22, 2008 the company announced that it was acquiring Athleta, a direct-channel retailer of women's athletic and activewear.<ref name=Athleta>[http://gapinc.com/public/Media/Press_Releases/med_pr_Athleta092208.shtml | Gap Inc. (GPS) Press Release, Gap Inc to Acquire Women's Active Wear Company, Athleta]</ref> Athleta reaches customers via catalogs and an online store, which will be incorporated into Gap's "universality" web platform as the fifth online channel in Gap's operations. The acquisition will cost Gap about $150 million<ref name=Athleta /> and is pending final arrangements.
+===Hard to Target Fashion Trends===
+Companies in the retail clothing industry are very sensitive to changes in fashion trends. The successful prediction of what will be "in" during the upcoming season is never a given, and when the company is wrong, the mistakes are extremely costly.
+While Gap and its sister brands performed strongly during the '90s, the decade since has seen a steep drop-off in their sales, largely due to key fashion missteps. One of the company's major mistakes was trying to sophisticate the Old Navy brand, which caused a disconnect between the brand and its loyal customers. The company is correcting the Old Navy brand by re-focusing on providing apparel for the whole family at low prices.
 == Competition ==