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Desperate times call for desperate measures.
Gap Inc., facing the biggest crisis in its 50-year history, is resorting to new tactics to get through a near standstill in sales as the coronavirus has idled more than 3,000 of its stores, with tens of thousands of workers furloughed. Among them: packing some stuff it was going to sell this spring and summer and keeping it for 2021 instead.
The move, called “pack and hold” in retail parlance, is rarely used as companies prefer to keep merchandise moving, get cash for it as soon as possible, and offer shoppers fresh items.
But with most clothing chains and department stores closed until further notice and facing the same build-up of unsold inventory, Gap Inc.’s newly minted chief financial officer Katrina O’Connell, sees “pack and hold” as a logical step compared to trying clearing all that merchandise after the summer—when everyone else will be as well—even if it means storage costs and waiting for revenues. It will be all the more tempting given the uncertainty around when stores might start to re-open.
“In many cases, that’s a much preferred economic option to the potential (profit) margin drain of needing to clear through those markdowns,” O’Connell told investors on Thursday afternoon in a strategy update.
What’s more, she argued, this will reduce cash outlays later this year when the time comes to place orders for spring and summer 2021.
The move reflects how urgent the situation is for Gap Inc., and apparel retail in general. The sector has been hard hit as people focus on essentials. H&M, to take one example, this week said its global March sales fell 46%. And all this comes after a brutal holiday season for a sector hurt by the abundance of choices and “sameness” in clothing.
Still, “pack and hold”—or “mothballing” to use a less kind but also used term—makes brands and retailers nervous: they worry about not offering customers fresh merchandise, and what that does to brands ultimately.
PVH, the parent of Calvin Klein and Tommy Hilfiger, is considering using the tactic even as its CEO, Manny Chirico, has expressed reservations about it. “This is not like wine that gets better with age. Your inventory gets worse,” he quipped last week.
At the same time, Chirico allowed that “pack and hold” can make sense for items that are less seasonal, especially if shoppers haven’t yet seen the products in advertising or in stores.
Both Levi Strauss and Lululemon Athletica have echoed that thinking on recent conference calls, noting that about 70% of what they each sell is “core” merchandise, meaning it doesn’t change much from year to year. So whatever’s unsold now can be held for a good while and not need to be sold at clearance prices.
For Gap Inc.’s Old Navy and Athleta, that logic holds. But for the Gap and Banana Republic, as fashion brands, that is riskier.
“For all these apparel brands there is always an element of fashion and being current in your product,” says Stacey Widlitz, president of SW Retail Advisors. So yes, Gap and Banana Republic sell a lot of basics, but they still have to consider elements of fashion like waist height and popular colors that can be different from one summer to the next.
Either way, the company will have to proceed with care, analysts say. “Retail is a cash churn machine; it’s about how fast you can turn inventory into cash,” said Nikki Baird, senior vice president of innovation at retail tech company Aptos.
Turnaround effort postponed
This was supposed to be a year of renewal for Gap Inc.
And for a few weeks, 2020 was promising. The clothing company got a well regarded new CEO in Sonia Syngal last month, its juggernaut Old Navy brand was shaking off a rare slump, and there were signs Gap Inc. was making decisive moves to fix its namesake and Banana Republic brands.
But the coronavirus outbreak has caused a major course correction for the $16 billion-a-year company, with protecting liquidity being priority number one
“For us, cash is king,” said O’Connell, who became CFO three weeks ago.
Gap Inc.’s moves to protect that king have so far included the classics like renegotiating lease terms with landlords and extending payment terms with suppliers. The company last month quickly canceled many existing orders. In one small bit of good timing, in March, the company was just about to place orders for the fall, but was able to reduce those orders.
Another tactic? Using its cloud with vendors to wait longer than usual to place holiday season orders, a process that would normally starting about now, and order less merchandise up front.
The expectation from Gap is that if things improve more quickly than expected and it wants “to chase into demand” as O’Connell put it, its vendors, assuming they aren’t too damaged by so many retailers canceling orders, will be able to supplement inventory for the holiday season quickly.
Everything Gap Inc. does now is with a view to saving money, O’Connell said. She suggested the company could speed up Gap brand store closings. And its ambitious plans to bring Old Navy’s footprint from 1,200 stores to 2,000 are on hold now. With its bolder turnaround plans suspended, Gap Inc is betting that just getting through a storm will make it a winner.
“The surviving retail companies will be able to realize a larger share of what’s likely to a smaller market,” she said. “We expect to be one of those survivors.”
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