Gap’s Plan to Thwart Online Retail Giant

YCharts

Gap Inc. (GPS) isn’t the hottest, the most stylish or the fastest-growing retailer. But when it comes to competing with Amazon (AMZN), it might be the savviest.

At its annual meeting with investors this month, Gap—whose brands also include Banana Republic and Old Navy—laid out plans to link its stores and website in one inventory pipeline. Starting in June, customers will be able to reserve clothes online and pick them up at a nearby store. And Gap is speeding up product development, simplifying its fabric orders and building regional distribution centers to send merchandise to the stores that need it most.

“Now the inventory can go anywhere,” CEO Glenn Murphy said. “This is such a huge unlock for us.”

After a strong 2012, Gap shares are at a ten-year high, as seen in a stock chart. But if the company can pull off its ambitious plans, it has a long-term opportunity to juice its profitability.

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GPS Chart

You know the description of a mullet haircut: “business in the front, party in the back”? Think of Gap’s strategy as the reverse mullet. In the front, its customers see colorful T-shirts and skinny jeans. In the back, the San Francisco retailer is becoming a disciplined technology center, borrowing data-analysis techniques from nearby Silicon Valley to sell its clothes at wider profit margins.

In short, Gap, with $15.7 billion in global sales last year, is becoming more like Amazon, whose IT strategies are years ahead of its rivals. But unlike Amazon—which loses money on many sales, and by its heavy discounting also inflicts pain on competitors, earnings its nickname “the suicide bomber of retail,” -- Gap aims to increase its already-healthy profit margins:

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GPS Operating Margin TTM Chart

Instead of Gap’s inventory being locked up in thousands of stores, soon it can be sent seamlessly to online customers’ homes, without shoppers knowing whether the item comes from an individual store or a distribution center.

To give an example, suppose that today, a floral Banana Republic dress in a size 2 is languishing in a Dallas store on markdown, but it appears to be sold out online. Once Gap connects all its inventory, it can sell that dress at full price through its website to a customer in Manhattan.

The idea to have shoppers reserve products in stores borrows from a service offered at Best Buy (BBY) and takes it a step further. While Best Buy customers have already paid for their merchandise online and are out the door in a blink, Gap’s shoppers will need their credit cards rung up when they arrive. This gives salespeople an opportunity to hawk other products.

The reservation service saves shipping costs for both the retailer and customers—helping Gap to compete with Amazon, which gives free shipping to its roughly 10 million “prime” members.

Gap is never going to become a fashion mecca—and it shouldn’t be. There’s plenty of demand in the world for striped cardigans and khakis. Most working women can’t pretend that pairing a blazer with tiny shorts and stilettos counts as “business casual.” Sorry, J. Crew.

Of course, there are risks ahead. Gap’s IT investments will be pricey—though its capital expenditures for this year aren’t going up that much—and it can’t fall behind on trends, as it did a few years ago. If it gets its next moves right, Gap could be one of the few mall darlings of the 1990s to emerge a winner in the new world of retail.

Amy Merrick, a contributing editor at YCharts, is a former staff reporter for the Wall Street Journal, where she spent 11 years writing about the Midwest economy, state and municipal finances, and the retail and banking industries. Her work has been published in the Poynter Institute’s Best Newspaper Writing series. She can be reached at editor@ycharts.com.


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