Gap re­turns to T-shirts in yet an­other bid for growth

Can the slump­ing com­pany fig­ure out what shop­pers want to wear? “It isn’t that a re­tailer can’t pros­per, it’s the model that’s got to change”

Bloomberg Businessweek (Europe) - - NEWS -

Art Peck, chief ex­ec­u­tive of­fi­cer of Gap, made a bold prom­ise last June at an in­vestor meet­ing in San Fran­cisco. Spring 2016, he said, would mark a fresh start for the com­pany and its flag­ship brand, a turn­ing point from sales de­clines and a two-year slump. He as­sured the au­di­ence that he and his top ex­ec­u­tives were fo­cused on de­liv­er­ing re­sults and new prod­ucts. “Spring is a no-ex­cuses mo­ment,” Peck said, “par­tic­u­larly in the women’s busi­ness.”

Ten months later, the trans­for­ma­tion has yet to ma­te­ri­al­ize. Sales have con­tin­ued to dis­ap­point. Op­ti­mism from bet­ter-than-ex­pected re­sults in Fe­bru­ary dis­ap­peared by the time March fig­ures were re­ported. Com­pa­ra­ble sales at Gap stores open at least a year and on­line have de­clined for the past eight quar­ters. With more in­ven­tory on hand than ex­pected in April, the com­pany will need to ag­gres­sively dis­count prices to sell the goods. An­a­lysts and in­vestors ques­tion whether Peck and his team have a plan and won­der just how much trou­ble the com­pany is in. “Spring was sup­posed to be a block­buster quar­ter for them,” says Simeon Siegel, an an­a­lyst with No­mura Se­cu­ri­ties, “and it didn’t ma­te­ri­al­ize.”

New prod­ucts are fi­nally on the hori­zon. Jeff Kir­wan, global pres­i­dent of the Gap brand, and Wendi Gold­man, ex­ec­u­tive vice pres­i­dent for prod­uct de­sign and de­vel­op­ment, say “pre­mium” and “qual­ity essen­tials”— namely T-shirts, jeans, and khakis— will bring back cus­tomers. Although new in­ven­tory is al­ways be­ing stocked, some of th­ese ba­sics will ar­rive in May, they say. Store win­dows high­light­ing the line will fea­ture white and color tees in dif­fer­ent fab­rics and cuts.

“Op­ti­mistic, cool, el­e­vated Amer­i­can style” is what Gap as­pires to, says Gold­man, one of the ex­ec­u­tives charged with re­viv­ing the once-iconic brand. But many shop­pers say Gap lost its cool rep­u­ta­tion years ago and now oc­cu­pies a mid­dle ground, with a bor­ing va­ri­ety of prod­ucts of lesser qual­ity than in com­peti­tors’ stores. “It’s just a lot of T-shirts and striped socks,” says Cathy An­der­son, who lives in Wash­ing­ton, D.C., and writes a fash­ion blog called Poor Lit­tle It Girl. “It’s re­ally messy—I’m not a rum­mager.”

Woo­ing cus­tomers will be tough, re­tail an­a­lysts say, be­cause many other big ap­parel re­tail­ers to­day also carry ba­sics, of­ten at lower prices. Gap’s sig­na­ture prod­ucts were “so sim­ple that ev­ery­one started do­ing it,” says Michael Ap­pel, pres­i­dent and founder of Ap­pel As­so­ci­ates, a re­tail con­sult­ing firm. “It’s very hard to keep the busi­ness go­ing on those ba­sic, core cat­e­gories when ev­ery­one else is knock­ing you off.”

“We have a mas­sive amount of cus­tomer eye­balls on our brand ev­ery day.” ——Jeff Kir­wan, global pres­i­dent, Gap brand

Gap carved out a niche as a cool, ev­ery­day ap­parel com­pany be­gin­ning with its found­ing in 1969. It dom­i­nated un­til about 2002, when a fast-paced ex­pan­sion left its fi­nances in dis­tress. Af­ter bring­ing in a se­ries of ex­ec­u­tives and slash­ing costs, it fum­bled over the next decade. In 2011, Peck be­came pres­i­dent of Gap North Amer­ica, soon in­tro­duc­ing a line of col­ored jeans that led to two years of com­pa­ra­ble sales growth and reestab­lished the com­pany as a leader in ca­sual Amer­i­can style. “When col­ored denim came out, it was great for ev­ery­one be­cause peo­ple didn’t have it. It was new and fresh,” Ap­pel says.

Gap has since suf­fered an iden­tity cri­sis. The com­pany—which in­cludes Old Navy, its best-sell­ing brand, and Banana Repub­lic—is con­fronting the same forces as other la­bels, J.Crew and Aber­crom­bie & Fitch among them. (Same-store sales growth at Old Navy has de­clined in four of the past five months.) As fast-fash­ion re­tail­ers such as H&M, as well as In­ter­net ap­parel com­pa­nies, have gained mar­ket share, shop­pers—es­pe­cially mil­len­ni­als, who fa­vor th­ese chains—find them­selves with more op­tions and lower prices.

“We have too many stores,” says Joan Volpe, man­ag­ing co­or­di­na­tor for the Cen­ter for Pro­fes­sional Stud­ies at the Fash­ion In­sti­tute of Tech­nol­ogy. “We have the de­vel­op­ment of mo­bile and e-com­merce, so it isn’t that a re­tailer can’t pros­per, it’s the model that’s got to change.”

Ev­ery re­tailer is com­pet­ing for a shrink­ing pool of cus­tomers who lately spend more of their money on meals or ser­vices, such as man­i­cures and travel. Still, they de­mand greater value and dis­counts from their cloth­ing pur­chases, says Gabriella San­taniello, pres­i­dent and founder of re­tail re­search com­pany A-Line Part­ners. That can hurt re­tail­ers in the long run if they can’t find ways to max­i­mize traf­fic with­out cre­at­ing the im­pres­sion that every­thing is al­ways on sale.

Gap reg­u­larly of­fers dis­counts to move in­ven­tory sit­ting on shelves and racks longer than it should. Signs ad­ver­tis­ing dis­counts of 30 per­cent, 35 per­cent, 40 per­cent are ubiq­ui­tous. “To as­sert we’re not go­ing to be a pro­mo­tional brand would be in­ap­pro­pri­ate,” Kir­wan says, “but I think we can change the way we com­mu­ni­cate value to the cus­tomer.”

Last June the com­pany an­nounced it would close a quar­ter of Gap stores in North Amer­ica, about 175. It has elim­i­nated 250 jobs, mostly at Gap head­quar­ters. The com­pany has re­vamped its web­site to fea­ture 360-de­gree views of prod­ucts and added video. It’s up­dated win­dow dis­plays and in­stalled in-store sig­nage to point out the at­tributes that make its jeans and T-shirts unique. And it’s try­ing to be more nim­ble, test­ing small num­bers of items on­line to de­ter­mine what shapes and de­tails cus­tomers like best be­fore stock­ing larger amounts in stores.

“We have a mas­sive amount of cus­tomer eye­balls on our brand ev­ery day,” Kir­wan says about Gap’s so­cial me­dia fol­low­ers, which in­clude about 7.7 mil­lion fans on Face­book and 1.2 mil­lion on In­sta­gram. The com­pany spends to mar­ket prod­ucts but isn’t plan­ning a full-blown ad cam­paign un­til the hol­i­day sea­son.

De­spite the stum­bles, some Gap cus­tomers are loyal. Al DiSal­va­tore, a 35-year-old pas­tor and school prin­ci­pal in Drums, Pa., shopped at a lo­cal store monthly be­fore it closed last July. Now he drives al­most two hours to go to a Gap in Philadel­phia, though not as of­ten as be­fore.

Ap­pel and other re­tail ex­perts say Gap is still an at­trac­tive brand, but it will have to dif­fer­en­ti­ate it­self in a crowded mar­ket. That re­quires re­sist­ing the urge to turn to what’s worked in the past, says an­a­lyst Howard Tu­bin of Guggen­heim Se­cu­ri­ties. “You need to pick a niche or a point of view,” he says. “The cus­tomer isn’t go­ing to come run­ning back into the store be­cause it’s a new sea­son and there’s more color. You need that wow fac­tor back.”

Lind­sey Rupp

The bot­tom line In­vestors and an­a­lysts are pes­simistic about Gap’s abil­ity to turn around eight straight quar­ters of sales de­clines.

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