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.