Breakout

How The Gap Got Its Groove Back

Breakout

Over the last two years the Gap (GPS) has come back from the dead. The stock has more than doubled, the fashions are in synch with the times, and the stores look great. It’s an incredible recovery for a chain that many left for dead long ago. This week the company is celebrating its 44th anniversary -the first store opened in San Francisco on August 21, 1969- and more importantly, it's recognizing the successes of a turnaround plan that went into place in 2011.

Retail expert Howard Davidowitz says the Gap did it by getting back to the basics and feasting on the failures of other chains. In the attached video, Davidowitz draws from his decades of experience to explain the Gap's revival:

Trimmed the fat

In the late 1990s the Gap stores simply had no more worlds to conquer. In ten years under Mickey Drexler as CEO, the company’s stock had gone from a split adjusted $0.75 to almost $50. The company store base had expanded to the point that it was actually starting to put two Gap stores inside one single mall.

But as fashion popularity waned, U.S. sales tumbled 32% between 2004 and 2011.

When current CEO Glenn Murphy took over in 2007 he rethought the business model and started cutting Gap locations and spreading the chain’s business focus to include all three of its properties: Gap, Banana Republic, and Old Navy.

In a world obsessed with growth, Murphy won by actually reducing his store base and focusing on quality.

Since the beginning of 2008, in North America the company has closed 250 Gap stores, 50 Old Navy locations and opened 50 Banana Republics. The store count is down, but a more balanced approach to Gap’s three divisions has given the company a more stable footing.

In 2011, the company accelerated this plan, announcing it would close 189 U.S. stores; 21% of its U.S. store base.

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Took share from the competition

While Gap stores were struggling, so were competitors.

Davidowitz says the Gap gathered the shoppers that JC Penney (JCP) left behind. “Penney’s took all the their business, threw it in the sewer and guess who was there with a baseball glove to catch it? The Gap."

The stock chart to the left shows both companies over the last two years. Over that time, JC Penney stock has lost over 45% of its value, while the Gap has increased an impressive 165%.

Last year, sales at JC Penney fell 25% and the ailing retailer reported a net loss of $985 million. For the critical fourth-quarter holiday shopping season alone, JCP lost $552 million. Meanwhile, Gap sales increased 8.2% last year to $15.7 billion. Their critical holiday sales quarter saw profit jump 61% with net sales of $4.73 billion.

The divergence between these two retailers is no coincidence. While JCP has been hemorrhaging customers, profit, and stock value, the Gap's numbers prove it's regaining consumer appeal.

Getting its 'fashion mojo' back

Perhaps most important to the Gap's rebound is that it got back to what it does best: making basics with an edge. “The Gap got its fashion mojo back! That’s the whole business and that’s why it’s working!” Davidowitz exclaims.

A couple of pictures tell 1,000 words.

Here’s a current example of Gap presentation:

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It’s clean yet hip. Attractive. Basic but with just a little edge.

Here’s an Old Navy ad from 2007 immediately prior to the arrival of Glenn Murphy:

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It says “we’re tacky” while simultaneously mocking customers who, as it turns out, quite frequently like trendy basic fashions. The less about that approach the better.

In 2011, CEO Glenn Murphy recognized Gap clothing seemed dull and wasn't appealing to its core female customer. He focused on refreshing its brands' fashions and restoring retail relevance. Here are some steps he took:

*New designers were brought in to restore the old American-classic Gap identity.

*Banana Republic was focused on must-have versatile work wear for the male and female professional.

*Athleta, its new workout wear brand, stuck to lower prices for high quality gear to gain traction against major competitors.

*Old Navy teamed up with Disney to launch an iconic t-shirt line called "Mickey Through the Decades."

Additionally, the Gap is connecting with consumers online in various ways, helping to fuel online sales growth of 27% during the first quarter of this year. They launched the fashion blog Styld-by.com, which connects with loyal fashionistas and will launch an aggressive ad campaign later this month on Tumblr.

Add it up and the Gap has become a force in retail again. In an industry where specialty retailers come and go, the Gap has been one of the few that managed to stay relevant over the years. Pay attention to the story, you may not see something like this happen for quite some time.

The Gap, Inc. will report second-quarter earnings results after the market close on Thursday, August 22nd.

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