The Rise And Fall of Gap


The massive clothing
retailer Gap Inc., parent company of
several brands including its original Gap stores,
is breaking up. Some big news out of
the company with plans to separate into
two separate companies, spinning off a yet
to be named company, NewCo, which will consist
of The Gap brand, Athleta, Banana Republic,
Intermix, and Hill City. Then the remaining company
will be Old Navy. Gap’s net sales slowed at
the turn of the 21st century, well
before the financial crash of 2007
devastated the retail industry. Over a decade
later, Gap Inc. continues to struggle. This is largely due
to the Banana Republic brand and the original
Gap stores, which haven’t recaptured the
explosive success they cultivated in
the 1990s. For the last few years,
Old Navy and the athleisure brand Athleta
have carried the company. Both have shown
consistent year-over-year sales growth
post-recession. Gap stocks surged by over
20 percent the day the news broke as
investors and analysts applauded the move. Frankly, it’s
about time. Old Navy is a nice
business, 3 percent same store sales growth, in
spite of an anemic fourth quarter. Now it’ll finally be able
to free grow on its own, with its laser
like focus I think it can beat
the 3 percent. But others are skeptical,
calling it simply a move to boost the
value of Old Navy. My initial instinct was that
this was a move for valuation, meaning
that Old Navy’s valuation was probably
a little depressed being inside of
Gap Inc. They’ve had to do something
to get the stock higher. This feels like
that something to get the stock higher. But this is
about the stock. This is not
about the company. Whatever the future holds for
Gap, this is a stunning move for a company
that grew from a single store in San
Francisco to become the defining apparel retailer of
the 1980s and 90s. The first Gap store opened
as The Gap in San Francisco in 1969. The store’s name was
a reference to the generation Gap between
the young, liberal baby boomers and
their conservative, postwar parents. Hoping to entice
the huge baby boomer generation, The
Gap’s founders Donald and Doris Fisher decided
to sell nothing but records, tapes, and
wildly popular Levi’s jeans. Jeans, especially
Levi’s, boomed in the 1960s and 70s
due to what fashion historians call the
casualization of the American wardrobe after
World War Two. People didn’t look sloppy,
but they certainly adopted more casual
bottom elements into their wardrobe. It was this very
clean, simple approach to getting dressed. The Gap was
an immediate success. By 1972 it had
twenty five stores, including one across the country
in New Jersey. In 1973, it began
offering other brands besides Levi’s, as well
as its own Gap label. By 1975, it had
186 stores in 21 states and sales of
100 million dollars. It went public
the next year. Donald Fisher appointed
Mickey Drexler as Chief Operating Officer
and President in 1983. Under his leadership,
The Gap saw explosive growth throughout
the next two decades. Under the leadership
of Mickey Drexler through the 80s and 90s,
Gap used to be the premium growth retailer
in America. At the time it
was smart, even hip as my parents
would have said. The Gap expanded its
own brands, founding Gap Kids, Baby Gap,
and Gap Outlet stores. It even dropped Levi’s,
the only product it sold in the original
Gap stores, in 1991. It also expanded beyond
The Gap label by acquiring Banana Republic
in 1983 and launching its discount brand
Old Navy in 1994. With these, The
Gap targeted three tiers of consumers: Banana
Republic for the upscale, Old Navy for
discount shoppers, and The Gap for
everyone in between. Old Navy in particular
took off, reaching 1 billion in sales
by 1997. I was in store number one
for Old Navy and I remember walking
out, calling back, and saying
to my boss I’ve just been in
the coolest, cheapest store on the face
of the earth. And Old Navy was
back in those days. They were the fastest
retailer to go from zero dollars in
sales to a billion dollars in sales. The company
simultaneously expanded worldwide. It opened
the first international Gap store in England in
1987 and expanded to France and Japan
in the 90s. Finally, The Gap
embodied the casual-cool, basic trends of the
80s and 90s. The casualization of
the American wardrobe continued into these
decades as offices began allowing increasingly
casual attire. Where The Gap really kind
of took off was casualization in
the office. The last leg of
casualization came really when people started wearing
khakis to work on Friday. Casual Friday is the
easiest way to think about that. The Gap made improbable
clothing, like khakis and turtlenecks, cool. In 1993, it released
an ad campaign featuring dozens of
celebrities in khakis. A few years later,
actress Sharon Stone wore a Gap turtleneck with
an Armani jacket to the 1996 Oscars. Gap’s annual sales grew
from 307 million in 1980 to over one
billion just seven years later. By 2001, sales had
ballooned to 13.8 billion. When you adjust for stocks,
Gap traded for 20 cents when Drexler took
over in 1983 and peaked at 52
dollars in 2000. Wow, what a spectacular
run, with the last big leap coming from
the rapid expansion of Old Navy right before
the turn of the century. At that time,
though, the U.S. economy slowed down. The Gap’s sales grew at
28 and 17 percent in 1999 and 2000, but slowed
to 1 percent in 2001. It hasn’t hit
double digits since. But a sluggish national
economy was only part of the problem. First, by the early
2000s, Gap’s apparel had lost its cool. Casual basics gave
way to Britney Spears-esque low-ride pants
and crop tops, which weren’t
Gap’s forte. Banana Republic and Old
Navy carried the company as The Gap
brand struggled to deliver what
consumers wanted. Next, the boardroom
was in turmoil. In 2002, then-CEO
Mickey Drexler retired after two years
of sluggish growth. Drexler’s design-driven
leadership had faltered when trends changed
in the early 2000s. The company
replaced Drexler with Paul Pressler, a
former Walt Disney executive. Pressler used
the cost-cutting ethos he developed at
Disney to improve Gap’s efficiency. It seemed to work. Sales growth rebounded
to 9.7 percent in 2003. But a New York
magazine profile from the time noted that this
uptick was likely due to products that Drexler
chose before his departure. And it didn’t
last: sales growth fell back to under 3
percent the next year, then slipped into
the negatives. Glenn Murphy, former CEO
of the Canadian drugstore chain Shoppers
Drug Mart, took over in 2007. CNBC reported at the
time that Murphy planned to give the
design team creative freedom, reflecting
Gap’s continuing struggle to be
cool again. As sales in the U.S. fell, Gap again pursued
growth abroad at a much faster pace than in
the 80s and 90s. From 2006 to 2008,
the company opened dozens of Gap and Banana
Republic stores across the Middle East and
Southeast Asia. But then of course,
the Great Recession devastated Gap and just
about every other retailer. Whether The Gap
was cool or not hardly mattered. Consumers slowed or
halted apparel shopping to save money. Under Murphy’s leadership,
The Gap tried several methods to
revive sales. It embraced strategies
to integrate digital and physical shopping
experiences, like allowing customers to shop
online and pick up items in store. Gap also acquired
two new companies: Intermix, a women’s
fashion brand, and Athleta, a fitness
and athleisure brand. Athleta in particular,
capitalizing on the spike in athleisure’s
popularity, has succeeded where other
Gap brands have struggled. From 2008, when
Gap acquired the brand for 150 million
dollars in cash, to 2014, the Athleisure brand
grew from an online-only presence to
about 80 stores. Gap doesn’t break
out Athleta’s sales numbers specifically, but
the other portion of its revenue, of which
Athleta is a part, consistently posts the best
sales growth in the company. During Murphy’s leadership,
Gap’s overall sales trended upward again,
reaching a peak of 8 percent
growth in 2012. But Murphy stepped down
in 2014 and sales drifted downward
once again. The company hasn’t yet
released its 2019, earnings but sales at
Gap stores fell every year from 2013 to
2017, and Banana Republic fared just as poorly. Millennials have flocked
to digitally-native brands like Everlane,
fast-fashion giants like H&M, or even
secondhand companies like ThredUp. Fast-fashion
retailers in particular have captured
a rapid fire wardrobe replacement rate
driven by social media. And I’ve seen it dozens
of times in the mall where people are shopping
and they already own a ton of
clothing in their wardrobe. But things have already been all over social media and so they don’t want to wear it again. Old Navy and Athleta
have carried the company for the last few years. To expand on Athleta’s
success, Gap launched a men’s athleisure line,
Hill City, in 2018. Meanwhile, Old Navy
leans on its family-friendly prices
and shopping experience. They know how to
really integrate the right fashion of the moment for their customer at the right price. And I think they are doing a great job. Old Navy is of particular importance to the company, making up over
40 percent of its sales since 2014. By 2020 though, the
discount brand will become its own company. This will leave The Gap with two struggling behemoths, The Gap
and Banana Republic brands, and a mixture
of much smaller brands: Intermix, Athleta,
Hill City, and the newly-acquired children’s
clothing line Janie and Jack. Analysts point to Athleta
as the brand with the most potential to
drive future growth. I think that a lot
of people would have assumed Athleta would have
been grouped with Old Navy. It will be
the crowned jewel, it will need to carry,
it will represent the growth. But it’s also
going to be benefiting by being part of
a larger company. Gap’s current CEO, Art
Peck, said the split, which should be complete
by 2020, will help each company craft
a “sharpened and strategic focus and
tailored operating structure.” But why now,
when the retailer has struggled for consistent
success for so long? I think the reality is
it appears it’s an acknowledgment that The
Gap really isn’t going to turn as quickly
or as much as they had wanted it to. If NewCo does revive
the ailing company, it’s possible that the iconic
Gap brand itself will play a smaller role
than it did in the company’s history. Certainly going to be,
relatively speaking, a much less important part
of this business once you separate
them off. So if you can shrink
Gap and grow Athleta fast, grow Hill City
fast, those pieces are more important to
the shareholder.

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