3 Things Gap Needs to Fix to Turn Its Struggling Business Around

A pedestrian walks past a Gap Inc. store in Miami Beach, Florida.

Scott McIntyre Bloomberg Getty Images

Gap needs a new game plan — and fast.

In April, the retailer announced the departure of the head of its Old Navy business, which had been hit by marketing missteps and supply chain snarls after being the company’s growth driver during the pandemic.

Then in July, Gap CEO Sonia Singhal abruptly resigned after nearly two years on the job amid declining sales and mounting challenges.

Gap has named a new leader for Old Navy, who took over earlier this month. But it still needs a permanent leader to guide the broader business — which includes its namesake brands, Banana Republic and Athleta — back to expanding its revenue.

Gap is scheduled to report its fiscal second-quarter results on Thursday afternoon, and the company expects sales for the period to decline a high single-digit percentage from a year ago.

As steep markdowns to clear bloated inventories are expected to hurt gross margins, Gap forecast its adjusted operating margin to be flat to slightly negative in the quarter.

Analysts are forecasting the company to report a loss of five cents per share on sales of $3.82 billion, according to Refinitiv estimates. This represents a 9% decline in revenue compared to the prior year period.

Gap shares are down more than 40% so far this year, as of Tuesday’s market close.

Dana Telsey, CEO of Telsey Advisory Group, described the company as suffering from “shocking performance across brands, uncertainty over leadership and direction, and a lack of visibility into sustainability with a clear plan for recovery.”

Here are three things Gap needs to do to get its business in good shape.

1. Find a CEO

The company has been without a leader since Singhal left last month, casting uncertainty over its future.

Bob Martin, Gap’s executive chairman, has been serving as interim chairman and CEO, with Singal assisting for a brief transition period. But analysts and investors want to see a permanent replacement with a strong track record.

Jane Haley & Associates retail analyst Jessica Ramirez said she wants to see a CEO with a strong background in retail who will push the company to innovate — particularly in its Banana Republic division, which needs to find a new identity coming out of it. Epidemic

Banana Republic, once a destination for workwear, is trying to adapt as more people work from home or choose more relaxed styles.

“Gap seems to consistently miss what the consumer is looking for,” Ramirez said. “There’s something that doesn’t stick.”

2. Get back on the old navy track

Old Navy, known for its budget-friendly clothing for kids and adults, has been critical to Gap’s success and will account for more than half of the company’s global total sales of $16.7 billion in fiscal 2021.

The business was on such a tear that in 2019 Gap is going to spin off Old Navy into a separate publicly traded entity. But those plans were scrapped in January 2020, with the company saying its performance was weak and that the costs of completing such a split would outweigh the benefits.

Then the Covid-19 pandemic hit, and big cracks started to form.

Old Navy’s net sales for the three months ended April 30 fell 19 percent to $1.8 billion from a year earlier. Same-store sales, which track revenue online and at stores open for at least 12 months, fell a full 22%.

Gaps caused by ongoing inventory delays exacerbated losses due to imbalances in sizing and assortment. It also acknowledged that as a result of a push to sell more plus-size items at Old Navy, the retailer has too many extended sizes and not enough of its core sizes.

In July, Deutsche Bank downgraded Gap’s shares from “buy” to “hold” due to “low visibility” around top-line recovery at Old Navy. Increased promotions in the apparel space are likely to have a negative impact on Old Navy as well, it said.

Earlier this month, Horacio “Hio” Barbeito — most recently president and CEO of Walmart Canada — took over as head of the business.

3. Verify the Yeezy bet

It was June of 2020 when rapper Kanye West first talked about collaborating with Gap on a clothing line under the name Yeezy. More than two years later, it’s unclear how much Yeezy gear can move the needle for Gap, if at all.

The first item in the highly anticipated Yeezy Gap line, a $200 nylon puffer jacket, didn’t go on sale online until 2021. But then in November, the single told analysts on an earnings call that one of the Yeezy hoodies was the most single ever. – Online sales in Gap’s history.

Debuting through a partnership with luxury fashion house Balenciaga, the items are mostly unisex in fitted and monochromatic styles: a $340 parka, a $120 three-fourth sleeve Y-shirt and $300 overalls.

Gap recently began stocking the products in some of its stores, including its flagship Times Square outlet in New York City. But the display of giant trash bags filled with Yeezy Gap merchandise at malls across the country has created confusion and drawn mockery online.

A representative for Gap did not respond to CNBC’s request for comment about the performance.

An analyst at Wells Fargo estimated that the Yeezy line would add about $1 billion in incremental revenue for Gap. But West’s creations should get people to spend money, once they’ve drawn fans to the shops.

“No matter what Kanye does, people will follow Kanye. He can get people through the door,” Ramirez said. “But if Gap’s actual assortment isn’t something that consumers want to stick around, they’re not going to.”

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