Gap has pulled an ad image that some found racially insensitive.
Photograph by Justin Sullivan — Getty Images
By Phil Wahba
June 17, 2015

Gap Inc’s (GPS) recipe for reversing the declining fortunes of its namesake and Banana Republic brands? Sell better clothes and react faster to fashion trends.

It sounds simple, but it’s a years-long problem bedeviling the specialty apparel company, which has reported 16 straight months of declining comparable sales on account of those two brands’ ongoing travails.

At Gap, which this week announced it was closing about 25% of its full-price North American stores, the locus of the problem has been in its women’s wear, notably last winter with wovens and knits, with poor fits and an unappealing esthetic, problems that led to a management shake-up a few months ago and the departure of creative director Rebecca Bay.

And at Banana Republic, the company made too large a bet on crop tops. And, by the admission of brand president Andi Owen, it did not offer enough color or prints, instead focusing too much focus on black and white, with silhouettes she conceded were “oversized and boxy.” Under its relatively new designer Marissa Webb, a star in her own right, Banana has started to offer more casual sensibility, though Owen admitted her division hadn’t executed it that well just yet.

While Gap Inc, which brought in $16.4 billion in revenues in 2014, is forging ahead with an international expansion, notably with big plans for China, as well as e-commerce, CEO Art Peck told Wall Street analysts on Wednesday that the fundamental problem to fix was fashion.

“Frankly, all the rest of it — global growth, digital, everything else that we’re doing — doesn’t matter if we aren’t better and more consistent at the product we put in our stores,” said Peck, a company veteran who took the reins in February after earlier stints that included overseeing e-commerce and the Gap brand.

All those fashion misses have led to price cuts, something that hits profit margins and is hard to wean customers off of. It’s especially true as more consumers have come to view apparel as a commodity and can go get designer clothes for cheap at T.J. Maxx or Marshalls.

“Value isn’t 40-off every day, and we have been way too 40 off every day in too many places at this company,” he said. “The second worst place to be in this business is overbought. The first worst place to be in this business is to be overbought with product she’s not responding to and that yields too many 40-offs.”

Gap Inc can overcome the problems of its second and third largest brands by taking a page from its largest brand, the lower-priced Old Navy chain, which has been on a tear in terms of sales growth and whose sales have risen by $1 billion in only three years. Gap, for instance, will make greater use of “fabric platforming,” in which it will buy huge quantities of a particular fabric and then create designs for that fabric rather than the other way around. The method will allow the brand to respond quickly to new trends, which is increasingly crucial to compete against fast fashion leaders like H&M and Uniqlo. Gap and Banana Republic will also test trends and then more quickly market and develop them.

It’s unclear if Gap and Banana will manage to get their fashion groove back. But investors and fashionistas alike will have to be patient: Peck said that results of the various steps the company has taken won’t kick in until the spring, a period he called the company’s “no excuses moment.” That means Gap will likely have another poor holiday season, which, in turn, will add to the pressure on Peck and his lieutenants to show their strategy is the right one.

“We need to gain market share in our mature businesses,” Peck said.

Gap Inc’s share price went up during Peck’s comments, so it looks like investors are willing to give the well-respected executive the benefit of the doubt. For a little while, anyway.

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