Mending the Gap: A New CEO/CFO Team Appears to be Getting Results

You know drastic steps are being taken when a national retail brand announces its intention to close its hometown flagship store, but such is the case with Gap. The iconic retailer has been taking extreme and some would say long delayed steps to putting the brand on sustainable path. But there appears to be reason for cautious optimism.

The past week’s quarterly investors call was a mix of good and bad news. Overall same-store-sales rose 13 percent while analysts were calling for a 21 percent drop in sales. Sales were off about 18 percent to $3.28 billion from $4 billion for the same period in 2019, yet it beat analysts expectations for $2.91 billion. But across the board averages tend to mask winners and losers. In this case the quarterly performance was akin to a baseball announcer’s call of two-up and two-down.

With Gap’s four core brands, the ups were Old Navy and Athleta and the downs were namesake Gap and Banana Republic. And like virtually every other retailer who has endured the COVID-crash, the saving grace has been its eCommerce sales which grew an average of 95 percent, while adding 3.5 million new online customers. As has been the case with many retailers, that eCommerce growth came with a margin hit of 380 basis points, due to increased fulfillment expenses.

All and all the Street-beating expectations, are being credited to the new CEO/CFO team of Sonia Syngal and Katrina O’Connell, who arrived last year and were charged with shoring up the iconic brands’ suffering performance and lack of focus.

Drilling Down

Looking at the top line triad of net sales, online sales, and comp sales, Athleta showed year-over-year increases across the board, which speaks to the brand’s successful positioning as well as the strong demand for athleisure, particularly during these stay-at-home, work-from-home times. In fact, it could be argued that for many, athleisure has become the new work-wear, once the sole possession of Banana Republic.

While Banana Republic had a meager 26 percent online lift, its net sales and comp sales were both in the red. With net sales down 52 percent it is quite likely that the 225 promised global store closings, scheduled through the end of the year will be distributed between Banana Republic and Gap.

Not Business as Usual

Even the notion of a major retailer announcing the planned closures of a couple hundred stores at the end of August, just ahead of the beginning of the holiday selling season, is jarring. It speaks to the state of Gap’s bloated store numbers, the softness of expected seasonal foot traffic and the weakness of the brands.

There have been calls for Gap to cut Banana Republic loose, given that the brand has lost its style identity, combined with the changing nature of the workplace. It is also arguable that the Athleta brand is siphoning off their sales from Banana, given the normalization of casual work attire and customers’ desires to build more dual-purpose wardrobes.

Navy League

Old Navy, which has consistently been Gap’s shining star saw a modest 5 percent overall sales drop, with a 36 percent drop in store sales. Both were offset by a phenomenal 136 percent online growth. The brand is being buffered from mall-fall, as they are predominantly in free-standing stores and strip mall locations. And once shelter-in-place directives were dropped customers returned more freely to their stores.

Old Navy’s high energy, Lizzo inspired back-to-school campaign was brilliantly conceived and highly motivating. It is also being scheduled to extend into October. And while back-to-school has been anything but normal, there is a sense that the hybrid of online-at-home and partial class attendance may actually extend the back-to-school shopping season, which Old Navy would likely benefit from.