GAP is struggling figure out next strategy
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At headline level, Gap’s second-quarter results look strong: Total group sales are up by 7.5 per cent, while US sales rose by 9.3 per cent.
However, these gains are inflated by a change in the way revenue is recognised and when this is accounted for, sales increased by a more subdued 4 per cent. Growth falls still further, to around 3.4 per cent, when currency fluctuations are taken into account. While such adjustments may seem pedantic they are important as they help give a true picture of how Gap is actually trading.
Regardless of the various financial mechanics, two things stand out from this quarter’s numbers. First, growth has slowed since the prior quarter – even though the consumer economy has strengthened. Second, growth is not evenly balanced across all parts of the business.
One of the notable areas of weakness is the Gap brand in the US. Here, total sales rose by a very modest 1.2 per cent. While there were some store closures, they were not so numerous as to drag down the growth rate significantly. Moreover, global comparable sales at Gap were down by 5 per cent, off the back of a 1 per cent decline in the prior year. That the Gap brand cannot deliver, even over a period of very robust consumer spending, is evidence that it is still broken. A rising economic tide does float all retail boats, but it cannot float those with holes in them and, in our view, the Gap brand is still a very leaky vessel.
The main problem is still the range. As much as Gap claims this has improved, there is scant evidence on the ground. The assortment continues to look samey and boring, with little effort being made to create newness or points of interest. This creates two problems. First, it discourages people from visiting and purchasing. Second, it means Gap struggles to charge full price and has to resort to continuous discounting to try and stimulate sales. Neither of these things are healthy.
“Total sales growth accelerated over the prior quarter, rising by a stellar 13.7 per cent, while comparables rose by a solid 5 per cent off the back of a good increase in the prior year.”
In our opinion, management needs to press the Gap brand’s reset button. The brand is adrift and needs a much clearer identity and sense of purpose. This is now an urgent requirement as a lot of other apparel brands – like J Crew, American Eagle, and Abercrombie & Fitch – are all upping their game and producing more consumer-centric collections. While the market is moving forward, Gap is, at best, standing still. This shows in our data, which indicates satisfaction with Gap’s proposition is still declining.
Old Navy “superstar”
Fortunately for the group, the superstar Old Navy has come to the rescue. Its results are the direct opposite of its troubled sister brand. Total sales growth accelerated over the prior quarter, rising by a stellar 13.7 per cent, while comparables rose by a solid 5 per cent off the back of a good increase in the prior year. There is definitely evidence that the strong consumer economy aided Old Navy, especially among families who were willing and able to spend more. However, the fact that the division continues to produce nice fashion edits at good price points is key to its success. Furthermore, we are encouraged by upcoming initiatives, such as the addition of plus sizes into the range.
Even Banana Republic managed to put in a better showing, although with a modest 2 per cent rise in comparables there is clearly more work to do in refining the offer. The jury is still out on whether the current recovery is sustainable.
Overall, the group has made some progress. However, the deep-seated problems at the Gap brand need to be resolved. And soon.
Questions & Answers
Q.Why are Gap's seemingly strong second-quarter sales figures not as positive as they first appear?
Why are Gap's seemingly strong second-quarter sales figures not as positive as they first appear?
The headline sales gains are inflated by a change in revenue recognition. When this and currency fluctuations are considered, overall group growth is a more modest 3.4 per cent, rather than the initial 7.5 per cent reported.
Q.What is the primary issue causing the Gap brand's poor performance despite a strong consumer economy?
What is the primary issue causing the Gap brand's poor performance despite a strong consumer economy?
The main problem is the merchandise range, which is seen as samey and boring with little newness. This discourages visits, reduces purchases, and forces continuous discounting to stimulate sales.
Q.Which division within the Gap group is performing well, and what factors contribute to its success?
Which division within the Gap group is performing well, and what factors contribute to its success?
Old Navy is the strong performer, with sales up 13.7 per cent. Its success is attributed to nice fashion edits at good price points, aided by the strong consumer economy and upcoming initiatives like plus sizes.
Q.What specifically indicates that customer satisfaction with Gap's offerings is declining?
What specifically indicates that customer satisfaction with Gap's offerings is declining?
The article states that internal data shows satisfaction with Gap's proposition is still declining. This reflects the brand's struggles to provide newness and points of interest in its assortment.
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