Gap Shares Soar After Company Unveils Three-year Growth Strategy

Kellie Ell
·5 min read

Gap Inc. executives put an optimistic spin on the business Thursday as they spoke with investors during the company’s 2020 Investor Meeting.

“We’re the biggest retailer in North America,” Sonia Syngal, the retailer’s chief executive officer, told the crowd virtually from the company’s San Francisco headquarters. She also pointed out that “in tough economic times, kids keep growing. We have the recession-proof assortment.” And, “We have led the casualisation of the American wardrobe.”

The ceo went on to unleash the company’s new “Power Plan 2023” go-forward strategy, all while reciting Gap’s assets like its strong cash flow, $16 billion in sales last year and customer base of 170 million people and continually referring to the Gap as a “category killer in the apparel space.”

“Our North Star is that we grow purpose-led billion-dollar brands that shape people’s way of life,” Syngal said. “We’re closely watching the economy, the retail landscape and the competitive environment to evaluate how we can strategically play to win; how we can do things that only we have the authority to do.

“I can go on forever about this, our teams and values,” Syngal continued. “Undeniably, our most important asset always is our people and the belief that they have for what this company stands for.”

The tactic seemed to work among investors at least for now. The stock shot up during Thursday’s session, closing up 13.65 percent to $21.15 a share.

The company’s four brands Gap, Old Navy, Banana Republic and Athleta all have different tactics for achieving growth. Broken down, the three-year formula will focus on product assortment, customer loyalty and brand awareness, the e-commerce business and omnichannel capabilities and a revised store fleet.

The end goal is to “drive low-to mid-to-single-digit sales growth annually, deliver [earnings before interest and taxes] margin expansion to achieve a 10 percent and beyond [earnings before interest and taxes] margin in 2023, generate operating cash flow of about 10 percent of sales and efficiently deploy cash through capital expenditures and return of capital to shareholders,” Katrina O’Connell, chief financial officer, said during the presentation.

That’s good news for the retailer, which lost $62 million in the most recent quarter.

Old Navy plans to increase revenues from $8 billion to $10 billion over the next three years, while doubling its e-commerce business by concentrating on key categories, such as active, denim and sleepwear.

The brand also plans to open about 30 to 40 stores a year, focusing on markets with populations of 200,000 or fewer people, offering an alternative to big-box retailers that are already in those markets.

“Stores matter; they really do,” Nancy Green, president and ceo of Old Navy, said during the presentation.

“They remain a very important underpinning of our strategy. You can’t create omni customers without stores,” added Green, who pointed out that omnichannel guests on average spend about three-and-a-half times more than single-channel shoppers.

The Gap will also focus on its “real estate issues,” according to Mark Breitbard, president and ceo of that brand. But the company’s largest brand will do the opposite of Old Navy. Instead, the Gap will shrink its North American store fleet. It’s planning to exit many of its mall stores. The brand pledged to reduce the number of locations in North America by 35 percent in the next three years, with 80 percent of remaining stores to be located outside of malls.

The brand also plans to increase global e-commerce penetration, while reconsidering its European operation, as previously reported by WWD. That could mean a possible exit of the European business, or a partial transition to a franchise model.

“One of the options being explored in our strategic review of Europe is the possible shift of our company-operated Gap e-commerce [business] and about 120 Gap stores in the U.K., France, Ireland and Italy, to a partner model by the end of the second quarter in 2021,” O’Connell said.

Meanwhile, Banana Republic also plans to close stores. The company expects to close a combined 350 stores in North America between the Gap and Banana Republic by 2023.

“By 2023 about 80 percent of our revenue at Gap and Banana Republic will be driven by off-mall strip outlets and online formats, which we believe significantly reshapes the brands and reduces the company’s exposure to declining malls,” O’Connell said. “Most of the leases of the first stores we’re closing expire during the next year, allowing us to exit properties that don’t meet our profitability hurdles relatively easily.”

She added that the company will likely accrue onetime exit charges of roughly $210 million for the remaining store leases, but said the company also expects a lower annual rent expense of up to about $45 million for stores that will continue to operate.

Athleta, the company’s fastest-growing brand, plans to increase revenues from $1 billion to $2 billion by 2023, by increasing brand awareness with about 100 new stores and a few strategic wholesale partners. The company anticipates Old Navy and Athleta combined will represent roughly 70 percent of sales by 2023, compared with about 55 percent today.

Other bright spots in the business include the Gap’s partnership with Kanye West’s Yeezy brand, which Breitbard said should be in stores in the first half of 2021.

Shares of the Gap are up about 20.5 percent year-over-year.

 

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