May 27, 2008
Gap Turns Lean & Mean
By Tom Ryan
Gap Inc. posted a 40 percent hike in first-quarter profit on the backbone of tight inventory and cost controls. Same-store sales fell 11 percent but some analysts still believe that the retailer’s long-awaited turnaround may finally be taking hold.
Gap has been able to avoid dramatic markdowns that had become commonplace across its banners – Gap, Old Navy and Banana Republic – by more effectively managing inventory. The more disciplined approach – combined with lower advertising expenses, layoffs, and other cost cutting – has helped increase Gap’s profits for four consecutive quarters.
In the first quarter, gross margins improved to 39.7 percent from 38.2 percent as both full-price and markdown profit margins improved due to lower inventories. Inventory per square foot fell 17 percent at the end of the quarter. Operating expenses declined to 28.3 percent of sales from 29.6 percent, partly due to reduced advertising costs. Although Old Navy still advertises, the flagship Gap chain has been off the airwaves for several quarters.
The ugly stat was the same-store drop, which marked the company’s worst erosion yet during its nearly four-year downturn. Gap’s comps have now declined in 15 consecutive quarters. Comps dropped 18 percent at Old Navy, seven percent at Gap domestic, five percent at Gap international, and four percent at Banana Republic.
Glenn Murphy, who replaced Paul Pressler as Gap’s CEO last July, has been working to improve traffic through among other initiatives, naming designers Todd Oldham and Patrick Robinson to help revamp merchandise at the Gap and Old Navy.
While Old Navy remains the most challenged, some analysts are wondering whether the flagship Gap chain should resume advertising. The company has no plans to do so at least for the second quarter.
On a conference call, Mr. Murphy, who formerly led Canada’s Shoppers Drug Mart Corp, outlined four factors underlying the Gap’s decision to make deeper inventory commitments and marketing more aggressively to consumers, according to Advertising Age. Brands must have good product, well-run retail environments and an “imaginative, creative” message for the target consumer. The fourth criterion, he said, answers the questions: “Is the consumer ready to respond to the marketing? What is the psyche of the consumer? How are they feeling at that moment?”
“If we can see those four sets of criteria being aligned, we’re happy to one, spend the money or, secondly, not spend the money, if we can’t see a return,” he added. “And just to be clear, we’re happy to invest more money to get a return if everything is lined up.”
Discussion Questions: Do you think the Gap’s low cost/tight inventory is a smart move for the company at this time? What do you think of Glenn Murphy’s four criteria for determining whether or not to become more aggressive in merchandising and marketing to consumers? How does a downtrodden brand decide when to become aggressive or stay conservative in chasing sales?
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Gap has a lot of issues and many of them are at the store level. Customer service, which is critical in the apparel game, is probably the worst in this specific selling category.
The Gaps I visited around the U.S. and Canada are mostly populated with what I call FoldBots. These are mechanical zombies that fold sweaters and pants and loose all other senses when performing their task. Managers locally need to step up and hire and train people that are going to SELL for them.
Nobody, and I mean nobody, should leave the store with only 1 item. This is an accessory driven business and the people on the floor are responsible for the revenue that comes in the door. The merchandising direction that the Gap is taking will help in the long haul as their assortment has become somewhat stale and allocation seems weak. But having the product and having the team to move the product are 2 vastly different things.
I would like to see better quality hiring and more sales floor training for Gap’s associates. The sales floor will be the key to Gap’s success.
GAP’s sales figures remind me of that ball that bounces back a little less each time: how long before there’s nothing left?
Is cutting back advertising (or any other expense for that matter) a good idea (?) if the money was being spent unproductively, then yes…but what does that say about management that millions/billions of $$ was being wasted? And what was it that finally made them wise-up?
To me, this sounds like Lampert-lite, only in this case the cost cutting follows the sales decline rather than precedes it…but either way, it’s a downward spiral.
Notwithstanding Gap specifically, in the low-growth environment we find ourselves in, managements must be extremely prudent about how aggressively they want to pursue the top line. Overly aggressive sales plans far too easily lead to excessive inventories, which lead to the markdowns which eviscerate margins.
In this environment, every retailer must manage inventory levels very closely. You can only pay vendor invoices with discounted retail dollars for so long.
Which brings me back to Gap. It’s not just the product that has eroded their cache, across all of their banners, it’s also the endless trail of markdowns resulting from unsustainable inventory levels, fed by unrealistic sales plans.
Gap is still running print ads but they are misleading. I was in their King of Prussia store recently and asked where their heavily advertised artist edition t-shirts were. I was informed that they were only sold in their New York store, but was told by a misinformed employee that I could order them online. I went online and saw that several select stores are selling these t-shirts and the offerings that are online are limited.
I agree with what was posted earlier–customer service is seriously lacking in these stores. The employees need to be better informed.
Also, Gap is always running these promotional campaigns (RED) campaign merchandise and now this artist campaign for the Whitney Museum, but try to purchase the stuff in your local neighborhood Gap store. They must think that all the fashionistas live in the cities, but they are wrong, wrong, wrong! Make it available in more stores–get rid of the tired cardigans and sell a sampling of the specialized clothing and it will set the brand apart from other retailers.
If all the companies who advertise stopped running ads because they wanted to fix their offer first, would the ad business decline 90%? 95%? 97%? It sure would be exciting to see. The world of advertising versus the real world: a huge gap!
Given the current economy and the struggles the Gap has faced and continues to face, I think that tightening is definitely a good strategy. I think the stated fact that they had a 40% increase in profit bears this out. To have that kind of profit increase on a dramatic sales drop means something is going right.
Even if they have cut back on inventory, having the wrong merchandise would still mean markdowns. Since there has been margin improvement, it seems as if they have made at least a baby step in improving the merchandise selection.
The Gap customer has been trained for so long to wait for a markdown that having some scarcity can help the long term goal. A business that has been so tough for so long does not turn around over night. I think the conservative strategy while they get their ducks in a row, is a good one.
I miss those really creative ads they used to run. While the merchandise wasn’t exciting or different from what other retailers were carrying, the commercials were fun and would make we wander into the store to see what was new (which was not much, see first part of sentence).
The clothes at Gap Kids and Baby Gap are adorable but I’m not paying $50 for a dress my daughter will grow out of before I get my $50 worth of wear. In today’s economy, I’m guessing I’m not the only one who thinks so.
Unfortunately, the merchandise at Old Navy (a one-time favorite of mine for the entire family) has skewed so much to the young that I can’t wear most of it and the quality has gone downhill. The creativity and “fun-ness” of their commercials has, too.
I hope Gap quickly realizes WHO their shoppers for each brand are and caters to them but after all this time, I don’t think it’ll happen soon.
Gap needed to take a step back and retrench. A low cost/tight inventory makes sense. While costs are being contained and inventories tightened, it’s also time to go back to basics: does what’s in the store appeal to consumers? If Mr. Murphy can bring Gap in step with consumer tastes, he will succeed.
From its lack of advertising, it would appear that Mr. Murphy does not believe that Gap has the correct products or assortment at this time.
As he says, until all four criteria are aligned, Gap and its sister brands will be a risk.
You have to be able to manage the paradox: creating cost efficiencies and giving the consumers what they want. Creating the efficiencies so that margins improved is great but that is only half the puzzle. It is also critical to have products that consumers want. Focusing on either half of the puzzle is not a path to success. Having costs out of line so that prices have to be too high to make money is not a good long term strategy. Having efficiencies so that margins are good but consumers don’t want the products is not a good long term strategy. You need to do both.
I agree with the other panelists that Gap has lots of work to do in the areas of merchandise content, marketing and the in-store experience. That being said, there is nothing wrong with tightening inventory controls and expense management during a downturn–that’s why Target and Kohl’s had less disastrous quarters than where Sears Holdings seems to be headed, for example. If Gap applies better controls to its business when demand returns, it will be in a better position to maintain profitability–but only if it fixes the problems affecting its top-line sales for years.
Managing inventory and expenses is one way to deliver profits but in reality, this method only lasts for a limited time. Ultimately, a retailer must have an offer that attracts the consumer in order to post positive sales growth. A company like Gap, with negative comps for 15 consecutive quarters, has problems that run much deeper than inventory levels or mark-down percentages.
This company has consistently failed to offer the consumer desirable goods. Despite the gimmicks, the fancy ads and designer influences, the store has continued to disappoint the consumer. There is little reason to visit the Gap, or any of its divisions with perhaps the exception of purchasing basics such as a five-pocket jean. But even these have suffered quality downgrades over the past few years and today’s denim is no where near the quality of past years.
The Gap needs a merchant at the helm. A merchant that can once again develop merchandise that drives customers into the store and get them to buy the store’s offer. Without top-line growth there is no growth and The Gap, once America’s best run apparel chain, continues to suffer.
The fact that the Gap has experienced a HUGE drop in same store sales while touting the fact that they are maintaining lean inventories is an indication that the Gap does not have the clothes that people want, when they want them. Anyone can make a profit by selling high margin product, and never putting it on sale. People who shop the store might purchase this product once, but they won’t become repeat customers. This lean inventory claim, along with the drop in same store sales, is the first indication that in fact the turn-around is far from around the corner.
Walk into a Gap store. The clothes are boring, the help is bored, and the offering is presented in a boring fashion. Lean inventories will not fix the Gap in the near future, in my opinion.
Cost controls and tight inventory will only go so far and buy some time. There can be no prosperity without healthy sales growth. I feel sorry for those companies who focus on cost and inventory rather than growth.
Toyota and GM provide a perfect example. While Toyota focused on growth through new technology, i.e. hybrid, GM was busy closing down factories and cost cutting!
Retailers can learn from other industries! For one thing, GAP has too many stores so the value of “GAP” brand is very much diluted. I have not seen any evidence that GAP has done something fundamentally different to sustain its long term profitability. To get excited about one quarter’s results is futile!
The Whitney tee shirts are for halo effect and should never be rolled out to suburban mall stores or I see $3.99 in their future. I always thought their aggressive markdown program accounted for cost discrepancies between locations–high profile locations never have as much merchandise on markdown as that store you expect to close when the lease is up.
I am trained to wait as much as the next person, but it’s interesting that when I see a great product at right price, I will buy it before markdown, especially if I think it won’t be around. That’s the secret of H&M and Forever 21–that shirt will be gone before it gets to markdown. Look at the understock or peak in a back room of a typical Gap store and it’s unlikely that the key pieces will disappear before a markdown.
Yes, the product veers between staid and not appropriate for someone over 25, depending on the season, what I’ve notice most in the past few years is how thin the merchandise has become. The tee shirts have half the fabric that they did 5 years ago when they were US sourced. Now the production is cheap but they need to stay light for freight charges from Asia. But though this is sold as fashion-forward, I suspect many customers perceive this as cheap. And the repositioning of Old Navy (and I know that the exec behind this is gone) seems more positioned to cannabilize the Gap sale.
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Gap has a lot of issues and many of them are at the store level. Customer service, which is critical in the apparel game, is probably the worst in this specific selling category.
The Gaps I visited around the U.S. and Canada are mostly populated with what I call FoldBots. These are mechanical zombies that fold sweaters and pants and loose all other senses when performing their task. Managers locally need to step up and hire and train people that are going to SELL for them.
Nobody, and I mean nobody, should leave the store with only 1 item. This is an accessory driven business and the people on the floor are responsible for the revenue that comes in the door. The merchandising direction that the Gap is taking will help in the long haul as their assortment has become somewhat stale and allocation seems weak. But having the product and having the team to move the product are 2 vastly different things.
I would like to see better quality hiring and more sales floor training for Gap’s associates. The sales floor will be the key to Gap’s success.
GAP’s sales figures remind me of that ball that bounces back a little less each time: how long before there’s nothing left?
Is cutting back advertising (or any other expense for that matter) a good idea (?) if the money was being spent unproductively, then yes…but what does that say about management that millions/billions of $$ was being wasted? And what was it that finally made them wise-up?
To me, this sounds like Lampert-lite, only in this case the cost cutting follows the sales decline rather than precedes it…but either way, it’s a downward spiral.
Notwithstanding Gap specifically, in the low-growth environment we find ourselves in, managements must be extremely prudent about how aggressively they want to pursue the top line. Overly aggressive sales plans far too easily lead to excessive inventories, which lead to the markdowns which eviscerate margins.
In this environment, every retailer must manage inventory levels very closely. You can only pay vendor invoices with discounted retail dollars for so long.
Which brings me back to Gap. It’s not just the product that has eroded their cache, across all of their banners, it’s also the endless trail of markdowns resulting from unsustainable inventory levels, fed by unrealistic sales plans.
Gap is still running print ads but they are misleading. I was in their King of Prussia store recently and asked where their heavily advertised artist edition t-shirts were. I was informed that they were only sold in their New York store, but was told by a misinformed employee that I could order them online. I went online and saw that several select stores are selling these t-shirts and the offerings that are online are limited.
I agree with what was posted earlier–customer service is seriously lacking in these stores. The employees need to be better informed.
Also, Gap is always running these promotional campaigns (RED) campaign merchandise and now this artist campaign for the Whitney Museum, but try to purchase the stuff in your local neighborhood Gap store. They must think that all the fashionistas live in the cities, but they are wrong, wrong, wrong! Make it available in more stores–get rid of the tired cardigans and sell a sampling of the specialized clothing and it will set the brand apart from other retailers.
If all the companies who advertise stopped running ads because they wanted to fix their offer first, would the ad business decline 90%? 95%? 97%? It sure would be exciting to see. The world of advertising versus the real world: a huge gap!
Given the current economy and the struggles the Gap has faced and continues to face, I think that tightening is definitely a good strategy. I think the stated fact that they had a 40% increase in profit bears this out. To have that kind of profit increase on a dramatic sales drop means something is going right.
Even if they have cut back on inventory, having the wrong merchandise would still mean markdowns. Since there has been margin improvement, it seems as if they have made at least a baby step in improving the merchandise selection.
The Gap customer has been trained for so long to wait for a markdown that having some scarcity can help the long term goal. A business that has been so tough for so long does not turn around over night. I think the conservative strategy while they get their ducks in a row, is a good one.
I miss those really creative ads they used to run. While the merchandise wasn’t exciting or different from what other retailers were carrying, the commercials were fun and would make we wander into the store to see what was new (which was not much, see first part of sentence).
The clothes at Gap Kids and Baby Gap are adorable but I’m not paying $50 for a dress my daughter will grow out of before I get my $50 worth of wear. In today’s economy, I’m guessing I’m not the only one who thinks so.
Unfortunately, the merchandise at Old Navy (a one-time favorite of mine for the entire family) has skewed so much to the young that I can’t wear most of it and the quality has gone downhill. The creativity and “fun-ness” of their commercials has, too.
I hope Gap quickly realizes WHO their shoppers for each brand are and caters to them but after all this time, I don’t think it’ll happen soon.
Gap needed to take a step back and retrench. A low cost/tight inventory makes sense. While costs are being contained and inventories tightened, it’s also time to go back to basics: does what’s in the store appeal to consumers? If Mr. Murphy can bring Gap in step with consumer tastes, he will succeed.
From its lack of advertising, it would appear that Mr. Murphy does not believe that Gap has the correct products or assortment at this time.
As he says, until all four criteria are aligned, Gap and its sister brands will be a risk.
You have to be able to manage the paradox: creating cost efficiencies and giving the consumers what they want. Creating the efficiencies so that margins improved is great but that is only half the puzzle. It is also critical to have products that consumers want. Focusing on either half of the puzzle is not a path to success. Having costs out of line so that prices have to be too high to make money is not a good long term strategy. Having efficiencies so that margins are good but consumers don’t want the products is not a good long term strategy. You need to do both.
I agree with the other panelists that Gap has lots of work to do in the areas of merchandise content, marketing and the in-store experience. That being said, there is nothing wrong with tightening inventory controls and expense management during a downturn–that’s why Target and Kohl’s had less disastrous quarters than where Sears Holdings seems to be headed, for example. If Gap applies better controls to its business when demand returns, it will be in a better position to maintain profitability–but only if it fixes the problems affecting its top-line sales for years.
Managing inventory and expenses is one way to deliver profits but in reality, this method only lasts for a limited time. Ultimately, a retailer must have an offer that attracts the consumer in order to post positive sales growth. A company like Gap, with negative comps for 15 consecutive quarters, has problems that run much deeper than inventory levels or mark-down percentages.
This company has consistently failed to offer the consumer desirable goods. Despite the gimmicks, the fancy ads and designer influences, the store has continued to disappoint the consumer. There is little reason to visit the Gap, or any of its divisions with perhaps the exception of purchasing basics such as a five-pocket jean. But even these have suffered quality downgrades over the past few years and today’s denim is no where near the quality of past years.
The Gap needs a merchant at the helm. A merchant that can once again develop merchandise that drives customers into the store and get them to buy the store’s offer. Without top-line growth there is no growth and The Gap, once America’s best run apparel chain, continues to suffer.
The fact that the Gap has experienced a HUGE drop in same store sales while touting the fact that they are maintaining lean inventories is an indication that the Gap does not have the clothes that people want, when they want them. Anyone can make a profit by selling high margin product, and never putting it on sale. People who shop the store might purchase this product once, but they won’t become repeat customers. This lean inventory claim, along with the drop in same store sales, is the first indication that in fact the turn-around is far from around the corner.
Walk into a Gap store. The clothes are boring, the help is bored, and the offering is presented in a boring fashion. Lean inventories will not fix the Gap in the near future, in my opinion.
Cost controls and tight inventory will only go so far and buy some time. There can be no prosperity without healthy sales growth. I feel sorry for those companies who focus on cost and inventory rather than growth.
Toyota and GM provide a perfect example. While Toyota focused on growth through new technology, i.e. hybrid, GM was busy closing down factories and cost cutting!
Retailers can learn from other industries! For one thing, GAP has too many stores so the value of “GAP” brand is very much diluted. I have not seen any evidence that GAP has done something fundamentally different to sustain its long term profitability. To get excited about one quarter’s results is futile!
The Whitney tee shirts are for halo effect and should never be rolled out to suburban mall stores or I see $3.99 in their future. I always thought their aggressive markdown program accounted for cost discrepancies between locations–high profile locations never have as much merchandise on markdown as that store you expect to close when the lease is up.
I am trained to wait as much as the next person, but it’s interesting that when I see a great product at right price, I will buy it before markdown, especially if I think it won’t be around. That’s the secret of H&M and Forever 21–that shirt will be gone before it gets to markdown. Look at the understock or peak in a back room of a typical Gap store and it’s unlikely that the key pieces will disappear before a markdown.
Yes, the product veers between staid and not appropriate for someone over 25, depending on the season, what I’ve notice most in the past few years is how thin the merchandise has become. The tee shirts have half the fabric that they did 5 years ago when they were US sourced. Now the production is cheap but they need to stay light for freight charges from Asia. But though this is sold as fashion-forward, I suspect many customers perceive this as cheap. And the repositioning of Old Navy (and I know that the exec behind this is gone) seems more positioned to cannabilize the Gap sale.