Resuscitating Gap

Can the slumping company figure out what shoppers want to wear?

Photographer: Caroline Tompkins for Bloomberg Businessweek

Art Peck, chief executive officer of Gap, made a bold promise last June at an investor meeting in San Francisco. Spring 2016, he said, would mark a fresh start for the company and its flagship brand, a turning point from sales declines and a two-year slump. He assured the audience that he and his top executives were focused on delivering results and new products. “Spring is a no-excuses moment,” Peck said, “particularly in the women’s business.”

Ten months later, the transformation has yet to materialize. Sales have continued to disappoint. Optimism from better-than-expected results in February disappeared by the time March figures were reported. Comparable sales at Gap stores open at least a year and online have declined for the past eight quarters. With more inventory on hand than expected in April, the company will need to aggressively discount prices to sell the goods. Analysts and investors question whether Peck and his team have a plan and wonder just how much trouble the company is in. “Spring was supposed to be a blockbuster quarter for them,” says Simeon Siegel, an analyst with Nomura Securities, “and it didn’t materialize.”

New products are finally on the horizon. Jeff Kirwan, global president of the Gap brand, and Wendi Goldman, executive vice president for product design and development, say “premium” and “quality essentials”—namely T-shirts, jeans, and khakis—will bring back customers. Although new inventory is always being stocked, some of these basics will arrive in May, they say. Store windows highlighting the line will feature white and color tees in different fabrics and cuts.

“Optimistic, cool, elevated American style” is what Gap aspires to, says Goldman, one of the executives charged with reviving the once-iconic brand. But many shoppers say Gap lost its cool reputation years ago and now occupies a middle ground, with a boring variety of products of lesser quality than in competitors’ stores. “It’s just a lot of T-shirts and striped socks,” says Cathy Anderson, who lives in Washington, D.C., and writes a fashion blog called Poor Little It Girl. “It’s really messy—I’m not a rummager.”

Wooing customers will be tough, retail analysts say, because many other big apparel retailers today also carry basics, often at lower prices. Gap’s signature products were “so simple that everyone started doing it,” says Michael Appel, president and founder of Appel Associates, a retail consulting firm. “It’s very hard to keep the business going on those basic, core categories when everyone else is knocking you off.”

Gap carved out a niche as a cool, everyday apparel company beginning with its founding in 1969. It dominated until about 2002, when a fast-paced expansion left its finances in distress. After bringing in a series of executives and slashing costs, it fumbled over the next decade. In 2011, Peck became president of Gap North America, soon introducing a line of colored jeans that led to two years of comparable sales growth and reestablished the company as a leader in casual American style. “When colored denim came out, it was great for everyone because people didn’t have it. It was new and fresh,” Appel says.

Gap has since suffered an identity crisis. The company—which includes Old Navy, its best-selling brand, and Banana Republic—is confronting the same forces as other labels, J.Crew and Abercrombie & Fitch among them. (Same-store sales growth at Old Navy has declined in four of the past five months.) As fast-fashion retailers such as H&M, as well as Internet apparel companies, have gained market share, shoppers—especially millennials, who favor these chains—find themselves with more options and lower prices.

“We have too many stores,” says Joan Volpe, managing coordinator for the Center for Professional Studies at the Fashion Institute of Technology. “We have the development of mobile and e-commerce, so it isn’t that a retailer can’t prosper, it’s the model that’s got to change.”

Every retailer is competing for a shrinking pool of customers who lately spend more of their money on meals or services, such as manicures and travel. Still, they demand greater value and discounts from their clothing purchases, says Gabriella Santaniello, president and founder of retail research company A-Line Partners. That can hurt retailers in the long run if they can’t find ways to maximize traffic without creating the impression that everything is always on sale.

Gap regularly offers discounts to move inventory sitting on shelves and racks longer than it should. Signs advertising discounts of 30 percent, 35 percent, 40 percent are ubiquitous. “To assert we’re not going to be a promotional brand would be inappropriate,” Kirwan says, “but I think we can change the way we communicate value to the customer.”

Last June the company announced it would close a quarter of Gap stores in North America, about 175. It has eliminated 250 jobs, mostly at Gap headquarters. The company has revamped its website to feature 360-degree views of products and added video. It’s updated window displays and installed in-store signage to point out the attributes that make its jeans and T-shirts unique. And it’s trying to be more nimble, testing small numbers of items online to determine what shapes and details customers like best before stocking larger amounts in stores.

“We have a massive amount of customer eyeballs on our brand every day,” Kirwan says about Gap’s social media followers, which include about 7.7 million fans on Facebook and 1.2 million on Instagram. The company spends to market products but isn’t planning a full-blown ad campaign until the holiday season.

Despite the stumbles, some Gap customers are loyal. Al DiSalvatore, a 35-year-old pastor and school principal in Drums, Pa., shopped at a local store monthly before it closed last July. Now he drives almost two hours to go to a Gap in Philadelphia, though not as often as before.

Appel and other retail experts say Gap is still an attractive brand, but it will have to differentiate itself in a crowded market. That requires resisting the urge to turn to what’s worked in the past, says analyst Howard Tubin of Guggenheim Securities. “You need to pick a niche or a point of view,” he says. “The customer isn’t going to come running back into the store because it’s a new season and there’s more color. You need that wow factor back.”

The bottom line: Investors and analysts are pessimistic about Gap’s ability to turn around eight straight quarters of sales declines.

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