Margins may have been pinched by desperate holiday discounting, but Gap (GPS) made it through the end of the year in respectable—if not exactly stunning—shape. Profit slid 12.5 percent to $307 million, a better result than Wall Street expected, and the retailer managed to tick up sales by the slightest amount at stores open more than a year.
It’s no secret by now that Gap Chief Executive Officer Glenn Murphy hates discounting, particularly when the company is forced to offer big sales in response to rivals. If Gap customers want to get a deal, Murphy believes, they should shop at the company’s Old Navy brand or its outlet stores.
So how is Gap going to maintain its edge this year without nicking margins even more? Three clear strategies emerged in the company’s conference call late on Thursday:
1. Steal from Lululemon. Gap is very much in warrior pose when it comes to women’s yoga apparel and general workout wear. It’s opened 30 stores under its burgeoning Athleta brand, bringing its total to 65, and promises to have 100 of the stores by the end of this year. Lululemon Athletica (LULU), in comparison, has 247 stores. Murphy called 2013 a “breakout year” for the brand. “Maybe it’s a little optimistic of us—or me, in this case—to call it the fourth iconic brand within our portfolio sooner rather than later,” he said. “But I think I was very impressed with our performance in 2013.”
2. Tailor the supply chain. Taking a page from Zara’s (ITX:SM) playbook, Gap is trimming away fabrics that aren’t incredibly versatile. It’s also designing more clothes to last in stores for six months to a year, rather than a single season. From a supply-chain and cost perspective, the benefits are clear. The fashion case is more muddled, but Gap hopes to freshen things up from time to time with new patterns and seasonal fabrics. Meanwhile, its designers are testing product much more aggressively in an attempt to mass-produce fewer fashion misses.
3. Kiosks for clothes. Gap already lets customers reserve clothes in half of its stores, which they can come in and purchase in-person. And its floor employees are now processing online orders with in-store inventory. The third step in the omni-channel ramp-up is streamlining a way for customers at Gap stores to order clothes for home delivery. Gap is working on several ways to make this happen, one of which is an ATM-like kiosk—a kiosk for khakis, if you will.