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David Olive: Gap Inc.’s CEO has an ambitious plan to revive the long-struggling retailer

David Olive: Gap Inc.’s CEO has an ambitious plan to revive the long-struggling retailer
Business
The long-struggling retailer’s turnaround efforts are beginning to pay off. And Gap has the potential to do better still if it can make inroads against rivals in the notoriously fad-driven and fiercely competitive apparel industry.

That’s a big “if” for a Gap that has failed at several turnaround attempts since losing its market dominance in casual wear in the late 1990s.

In her ambitious plan to revive Gap, CEO Sonia Syngal, Gap’s fourth chief executive in 18 years, is closing more than 300 stores at the firm’s underperforming namesake Gap and Banana Republic chains. That’s about 8 per cent of Gap Inc.’s total store count.

At the same time, Syngal is adding scores of new outlets at Gap’s successful Old Navy chain, a value retailer; and at Athleta, a women’s athletic and fitness gear merchant that is Gap’s fastest-growing chain.

And Gap now generates more than 40 per cent of its sales from e-commerce.

At Old Navy, which Syngal headed for four years before being tapped to run parent Gap Inc. last March, Syngal got a head start on many retailers in more closely partnering online stores with their bricks-and-mortar siblings.

“Customers often preordered items online, then came into the store to try them on,” said Syngal, who started each day at Old Navy reading about 400 customer comments.

Or they ordered online items they’d first seen in traditional stores that now function as showrooms.

In its own latest turnaround plan, Hudson’s Bay Co. recently unveiled a similar strategy for its online and traditional stores.

Syngal hasn’t given up on Gap or Banana Republic, though Wall Street long ago assessed a negative value to each chain.

By slashing Gap’s product offerings by one-fifth and focusing on quality, the once-iconic chain has arrested a decade-long sales decline.

And at Banana Republic, whose sales have stagnated for a decade, Syngal has shifted the product mix to casual sweatshirts and cardigans from the chain’s longtime mainstay of career clothes, which stopped selling in the pandemic.

From Syngal’s description of value chain Old Navy, which accounts for more than half of the parent company’s revenues, it will be her main testing ground for women’s plus-size apparel.

True, but all of Gap’s four major chains are now emphasizing plus-size clothing, a major and mostly untapped market.

“The average woman in the U.S. wears a size 16 to 18,” Syngal notes, “so with very few competitors in the plus-size space,” Gap stands to take a bigger share of the $120 billion (U.S.) women’s apparel market.

With more appealing products and less drag from underperforming stores, Syngal’s strategy is beginning to work.

Gap just posted its biggest second-quarter revenues in more than a decade, amounting to $4.2 billion.

And in the first half of fiscal 2021, Gap’s profit was $424 million compared with a $994-million loss in the year-earlier period.

Because Gap sources all its products abroad, especially from Vietnam and China, Wall Street analysts expected the firm to suffer from this year’s global supply-chain disruptions.

But Syngal has been able to keep stores well-stocked despite that and the sharp rise in demand with the lifting of lockdown restrictions.

“Concerns were overblown,” said an excited Wells Fargo & Co. report Aug. 27, when Gap’s latest results were released. Gap’s “business (is) not only strong, it’s accelerating.”

Gap has become a stock-market darling.

Gap shares have gained 31 per this year and are up 52 per cent over the past 12 months.

Early in her career, Syngal, now in her early 50s, was not an obvious candidate to be running America’s biggest specialty apparel retailer, with 2020 revenues of $13.8 billion.

Gap is also one of Canada’s biggest retailers, with 2020 revenues of about $900 million. Athleta announced this week it is launching its brand in Canada, its first international business.

Syngal was born in India and raised in Montreal before her family relocated to the U.S. In Montreal, Syngal learned to sew and was making prom dresses for friends.

But Syngal chose engineering for her university studies. And in long stints at Ford Motor Co. and then-Silicon Valley giant Sun Microsystems Inc. she acquired the manufacturing, logistics and supply-chain skills she brought to Gap. She joined Gap in 2004 as vice-president of product sourcing strategy.

In forecasting buoyant revenues ahead, Syngal describes a “peacocking effect” among shoppers eager to shake off pandemic isolation with bold and colourful clothing.

But that’s a rising tide that will lift all boats.

In the meantime, the reinvention of Gap is still a work in progress.

With more than 3,000 stores in 40-plus countries even after pruning its store “fleet,” Gap’s store count and geographic footprint are daunting. The exacting product selection, pricing and customer service for which Syngal is striving will be tough to achieve over a sprawling network.

Gap and Banana Republic remain ill-focused. They have shown few signs of increased ability to compete with Zara, H&M, Winners, Uniqlo and American Eagle Outfitters, along with traditional department stores like Hudson’s Bay Co. and Macy’s Inc.

Gap has hopes of doubling Athleta’s sales, to about $2 billion by 2024. But the brand faces tough competition from Vancouver-based Lululemon Athletica Inc. With revenues of $4.4 billion, Lululemon boasts four times Athleta’s current revenues.

And Syngal’s Gap Home gambit strikes many industry analysts as dicey.

Last week, Syngal said she has set her sights on a vast market she estimates at $326 billion in products Gap already sells plus home decor, furniture, bedding, bath products, sleepwear, throw pillows and other Gap Home goods.

In the main, those are products Gap has never sold.

And with the nascent Gap Home business, Syngal is pitting her firm against still more competitors. They include well-established rivals Bed Bath & Beyond and HomeSense, which, like Lululemon, won’t easily surrender market share.

That said, the focus Syngal is bringing to Gap has won Wall Street’s favour. That’s an improbable turn. Even now, the word on Wall Street about the company’s founding chain is that “Gap has been a dying brand for a decade.”

But analysts with “buy” ratings on Gap stock are forecasting one-year gains ranging from 27 per cent to 73 per cent.

Indeed, even with the gains that Gap shares have made over the past year, the stock still trades at only 65 per cent of its latest peak of $43 in 2015.

And the shares are priced to sell, trading at one of the industry’s lowest price-earnings multiples — just 14 times earnings compared with TJX’s 35 and Lululemon’s 77.

Still, the cautious investor, wary of rapidly changing fashions in both the apparel and the stock markets, will want a bit more evidence that Syngal is able to create a sustainably profitable Gap.
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