Is the pandemic giving Gap Inc. one last chance? #SmallBiz - The Entrepreneurial Way with A.I.


Friday, July 17, 2020

Is the pandemic giving Gap Inc. one last chance? #SmallBiz

Dive Brief:

  • The pandemic is providing Gap Inc. with fresh opportunities, including rightsizing its brick-and-mortar fleet in confrontations with landlords over unpaid rent, growing its Athleta brand amid interest in athleisure and attracting value-minded customers to Old Navy as the economy falters, Wells Fargo analysts said Friday.

  • The retailer's namesake Gap brand has a chance to re-introduce itself to America through its recent tie-up with Kanye West's Yeezy brand, but is on a short leash and will have to prove its value, according to a note detailing the Wells Fargo team's recent meeting with Gap Inc. CFO Katrina O'Connell and investor relations chief Tina Romani.

  • Cost cuts and expense management are in focus, with investments centered on lower-cost efforts like the Yeezy partnership, its licensing deal with IMG and franchise opportunities, according to the team led by Senior Analyst Ike Boruchow.

Dive Insight:

Nobody wants a pandemic, and this one, in addition to taking lives and kicking the economy into recession, has devastated many retailers and retail jobs, including at Gap Inc.

But the company's executives made clear to Wells Fargo analysts recently that in some of the fallout of the pandemic they see a chance to save money and attract new customers. Most stark is the aggressive approach to its brick-and-mortar footprint, which has landed it in court over non-payment of rent on stores that were closed in the spring in hopes of containing the disease outbreak. Gap is deep into negotiations with landlords to tamp rents down low enough to "flip losses to profits," and if they don't pan out, locations will close, the executives told Wells Fargo. 

"[Gap Inc.] is using the crisis as an opportunity to accelerate their fleet optimization strategies and leverage their scale to renegotiate rent, now that it is clear that even fewer shoppers will be heading to stores over the long-term," Boruchow wrote in emailed comments, noting that while the company had already said it would close 230 stores, including 170 Gap stores, it now plans on more and has added Banana Republic closures to the mix. (With its San Francisco headquarters and several distribution centers, the company has its own real estate assets, too, totaling $1.9 billion according to this note.)

But the apparel company isn't just playing hardball with its landlords — it's also getting tough with its own namesake. In general, that means that "tolerance for prolonged underperformance is low, and there are no emotional attachments to any of the brands," Wells Fargo noted. That includes — or maybe even specifically refers to — the iconic Gap brand that once defined American casual style.

While some observers have questioned Yeezy's potential in reviving Gap, Boruchow sees hope in it. West on Thursday teased a Gap x Yeezy apparel fitting, and the bright colors of some of the garments suggest that he aims to call attention to a brand that seems long forgotten. It behooves Gap Inc. to do right by the label, considering, as Wells Fargo points out, it remains a $4.5 billion business, with global awareness.

With Gap (and Banana Republic, whose workwear focus sidelined it further in the most recent quarter as people worked from home) on a sort of probation, the company is pinning most of its hopes on Athleta and Old Navy.

Despite Old Navy's poor results last year, a performance that helped scuttle the company's plans to spin it off, Gap Inc. executives told Wells Fargo that they've figured out (and corrected) the problems, namely that previous cost cuts went so deep that they lost talent and wrecked the assortment.

Now they say the pandemic-fueled recession and consumer uncertainty are set to draw more customers to the brand's cheaper offering. The brand also runs a lot of off-mall locations, a plus at a time when shoppers are avoiding malls even more than they did before. And the unprecedented level of store closures and bankruptcies "will leave ample market share up for grabs for [Old Navy], particularly in their robust active wear and kids/baby categories," according to Wells Fargo's note. Executives told the analysts they expect the brand to reach $10 billion over the long-term, up from $8 billion last year.

Gap Inc. also expects Athleta to work out, especially now that people are working out from home, and often spending more time in their workout gear. Wells Fargo is buying that, nodding to Lululemon's recent performance and ambitious growth plan as an example of what they called Athleta's "unappreciated" capacity to "drive nearly 20% of GPS EBITDA by [fiscal year 2021]." There's room to maneuver — Athleta enjoys just 53% brand awareness right now — which executives see as "a clear path" to $2 billion in revenue, from "just under" a billion today.

via by Daphne Howland, Khareem Sudlow