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Gap (GPS)Stock (Retail Industry, Apparel Stores Industry, Fashion Industry Industry, Consumer Products Industry)
 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]
[edit] Business OverviewGap Inc. is one of the largest companies in the apparel retail market with 3,177 store locations[8] (as of Q2 FY08) and over $15 billion in annual sales[9]. 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 2005-2007 (of -5%, -7% and -4% in each consecutive year respectively) as net sales have fallen every year since they peaked at $16.2 billion in 2004 to $15.7 billion in 2007.[10] Despite falling sales, Gap has been able to maintain relatively healthy gross and operating margin figures, 36.1% and 8.3% in 2007, by managing inventory levels and staying away from merchandise markdowns and promotional selling activities that inflate operating expenses.  [edit] The Gap BrandsGap 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 2007, Old Navy accounted for 42% of sales, with Gap responsible for 40% and Banana Republic accounting for about 17%.[11] [edit] Gap StoresThe Gap brand's main focus is casual attire targeted at consumers between the ages of 18 and 30. 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 1,245 stores in North America and 283 stores internationally as of May 2008.[12]. Net sales for the Gap brand decreased almost 4% during 2007[13] and same store sales at the Gap decreased 7% in the first quarter of 2008.[14] [edit] Old NavyTargeting 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.[15] Old Navy's net sales fell 2.4% in 2007[16] while the brand's same store sales fell 4% in the first quarter of 2008.[17] 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. [edit] Banana RepublicDeemed 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.[18] Also, while sales at Gap and Old Navy fell in 2007, Banana Republic's sales grew nearly 7% during the year[19]. 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[20] as shoppers turned away from the higher prices of Banana Republic's merchandise. [edit] Other BrandsForth & 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.[21] [edit] Trends and Forces[edit] Economic Headwinds in 2008 Complicating TurnaroundSince 2004, Gap's sales have been faltering and the company is in the midst of a turnaround effort, focusing on maintaining profit margins (gross and operating) while fostering sales growth. This has proven difficult in the second half of 2007 and the first quarter of 2008 due to economic conditions. After the subprime lending crisis in the summer of 2007 the U.S. economy is struggling and many banks and economists are forecasting a recession. Additionally, oil prices have hit record highs in May 2008, causing spending on gasoline and other energy-related necessities to take up increasing proportions of consumers' disposable income. As such, consumer spending has been shifting away from non-necessary goods, such as fashion apparel. Consequently, apparel retailers have been struggling to maintain sales in 2008. On a company-wide basis, same store sales fell 11% in the first quarter of FY08[22], while the Banana Republic brand was hit hardest of all Gap's operations, with an 18% decrease in same store sales.[23] Banana Republic's poor results stem from consumers shifting away from the higher prices of "near luxury" retailers. This trend continued in the second quarter of 2008 resulting in a 4.8% decline in net sales for the first half of FY08, however Gap was able to increase first half net profit by 44% by cutting operating expenses in the first half of 2008 by 7.9%.[24] Rather than marking down merchandise to keep sales numbers high, Gap chose to keep prices constant and turn over less inventory to increase profitability from 2007. As the economic outlook is uncertain at best, with the Federal Reserve hinting that there will be no more rate cuts to appease the market, the Gap has cut back on its store expansion plans and increased its store closure plans. [edit] International Growth: Diversifying Sources of SalesIn the long term Gap plans on expanding their international operations from their current base of 308 stores (as of May 2008) between Europe and Asia. International sales grew 4.5% in 2007 (while domestic sales fell 2.3%) to $2.5 billion[25], accounting for 16% of total company sales for the year. In the first quarter of 2008, international sales grew 12.7%[26] while sales fell in the company's domestic operations. The company's international operations are split between the Gap and Banana Republic (Old Navy does not have stores outside of North America as of Q1 FY08)[27]
[edit] Increasing Importance of Online SalesGap's online (direct-to-customer) sales growth has outstripped growth in any of the company's other operations (partly due to the differences in scale between the $6 billion Gap and Old Navy brands and the $903 million online business). In 2007, Gap's online sales grew 24% to $903 millio[28], while most recently online sales grew 21% in the first quarter of 2008[29]. Online sales include sales from the websites of the Gap, Old Navy and Banana Republic brands as well as the online-only brand Piperlime. On May 27, 2008 Gap Inc. announced that all four of its brands would begin to operate on one online platform, allowing customers to shop from all four brands simultaneously using one common virtual shopping cart. The company is offering a flat shipping rate of $7 on all orders from Gap, Banana Republic and Old Navy, while Piperlime will continue to not charge its customers for shipping. This "universality"[30] could lead to increased sales from customers investigating brands that they don't typically shop, or could hurt sales if customers don't respond well to the association between the brands. By putting all four of its brands under one online operation, Gap risks diluting the image each brand tries to evoke; for example, Banana Republic customers seek fashionable, high quality apparel that evokes a sophisticated image and may not like the idea of the brand being associated with the value brand image of Old Navy, or may be deterred from paying a premium for Banana Republic items that are similar to lower-priced Old Navy clothing found on the same website. [edit] Acquisition of AthletaOn September 22, 2008 the company announced that it was acquiring Athleta, a direct-channel retailer of women's athletic and activewear.[31] 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[31] and is pending final arrangements. [edit] Hard to Target Fashion TrendsCompanies 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. [edit] CompetitionGap's three major brands target different customers with very differing merchandise mixes. As such, each brand competes with a different set of other retailers:
 Gap2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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