Struggling Gap ‘in search of purpose and identity’

With comparable group sales increasing by 2 per cent this has been a quarter of progress for Gap.

That the result was delivered in a tough market is an achievement, although the easy prior year comparative of minus 5 per cent takes away some of the glory. The bottom line is also looking better with operating income increasing by 14.4 per cent over the prior year.

Unfortunately for Gap, the group’s progress is all down to Old Navy. Over the quarter the brand’s comparable sales increased by a very robust 8 per cent while its total sales in the US rose by 7.4 per cent. These upward movements were all beneficial to the bottom line.

Outside of this powerhouse of growth, the company’s other brands fared far less well. Globally, Gap’s comparable sales slipped by 8 per cent, with total sales in the US dropping by 4.3 per cent – both off the back of weak prior year comparatives. Banana Republic was up against an even softer prior year same-store figure of -11 per cent. Even so, it still managed to post a 4 per cent decline this time around with sales in the US firmly down.

This imbalance means that Gap is firing on just one cylinder. More worryingly, it also undermines the group’s contention that improvements to styling, quality, and fit are delivering results.

On the contrary, we believe that Gap and Banana Republic are still brands in search of a purpose and identity.

This does not mean to say that no progress whatsoever has been made. The group has, for example, made supply chains nimbler, reducing the time it takes garments to go from design to rail. This is a positive step which gives the company more flexibility in assessing how well certain products are selling – something that will help it avoid overstocks and heavy markdowns. However, this improvement does not provide answers as to what sort of aesthetic or market segment Gap or Banana should be serving. These things can only be determined by a coherent brand strategy, something we believe is still wholly absent across the two troubled brands.

The Gap brand is less problematic than Banana Republic. Here, the basics business, while diminished from market share losses to players like H&M, is still ticking over. There have also been a handful of product and category successes over recent quarters – just not enough to lift the division out of its funk. In our view, Gap is not a disaster zone and, over time, can be salvaged. It is certainly likely to become a smaller business but, if it makes more effort, there is a place for Gap in today’s retail market.

Banana Republic is in a much less fortunate position. The brand has lost any semblance of an identity. Its assortment is a confused mishmash of products which are overpriced and out of step with what modern consumers want. The business has no real purpose, and unless management can pull off a radical repositioning, the division is doomed to terminal decline. At present, we see no sign of progress and, in many ways, trying to nurse Banana back to health is an enormous distraction from the better parts of Gap’s business.

Looking ahead, the pressures on Gap will continue, and the sales forecast is for a flat to slightly negative year. However, this is predicated on the continued success of Old Navy. Should that brand stumble in merchandising or assortment, the final year outcome could be significantly worse.

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