OCD44

UNIVERSITY OF BOLTON

WESTERN INTERNATIONAL COLLEGE FZE

BUSINESS MANAGEMENT

SEMESTER 1 EXAMINATIONS 2016/2017

STRATEGIC MANAGEMENT

MODULE NO: BAM6002

Date: Saturday 14th January 2017 Time: 10:00am – 01:00pm

INSTRUCTIONS TO CANDIDATES: Answer ALL questions.

This is an open book examination and you are able to bring with you 2 x A4 pages (4 sides) of notes. Text books and reference materials are NOT allowed.

You must hand in your notes with your exam paper.

The examination questions are based on the pre-released case study (attached).

Page 2 of 2 University of Bolton Western International College FZE Business Management Semester 1 Examination 2016/2017 Strategic Management Module No. BAM6002

ANSWER ALL QUESTIONS

1. Critically examine the industry competitiveness and attractiveness with the help of appropriate concept and theories. (25 marks)

2. Critically examine the strategies that Gap Company should implement by taking advantages of the opportunities that exist in the industry while utilizing its strengths? And manage its weaknesses while avoiding potential threats imposed by competitors and/or the industry. (25 marks)

3. Identify strategies that CEO of Gap Company should consider in order to continue surpassing its rivals in the industry. (25 marks)

4. Critically analyse various factors which will influence Gap companies expansions strategies. (25 marks)

END OF QUESTIONS

23 Gap Inc. — 2011 Sharynn M. Tomlin Angelo State University

GPS http://www.gapinc.com Headquartered in , Gap Inc. opened its first stores in Serbia and Ukraine in 2011, broadening the clothing chain’s reach into Eastern . Gap stores just opened in Belgrade and Kiev. Stephen Sunnucks, Gap’s international president, said in a statement that the Ukraine is the fastest-growing market in Eastern Europe, while Serbia has many young customers who enjoy shopping. Gap now has stores in 24 countries throughout , Europe, , the , and . The retailer has about 180 franchise stores and plans to increase that to 400 by fiscal 2015. Gap Inc. has divisional presidents based in London, Tokyo, Shanghai, and San Francisco. The company also operates Republic and stores. Gap (often referred to as “The Gap”) is a popular retailer providing clothing, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, Banana Republic, , and Athleta brands. Stores are located in the , , China, the United Kingdom, , Ireland, and . On January 30, 2011, the company employed about 134,000 people with 3,231 store locations. Additionally, it has agreements with unaffiliated franchisees to operate Gap and Banana Republic stores in other countries around the world. Under these agreements, third parties operate or will operate stores that sell apparel purchased from the company under its brand names. Also, customers can shop online at gap. com, oldnavy.com, bananarepublic.com, piperlime.com, and athleta.com. Other Gap-owned retail outlets include GapBody, GapKids, and babyGap. The company provides a wide range of family clothing products, including denim, khakis, T-shirts, fashion apparel, shoes, accessories, intimate apparel, and personal care products. All Gap clothing is private-label merchandise made specifically for the company. From the design board to store displays, Gap controls all aspects of its trademark casual look. Gap’s July 2011 revenue at stores open at least a year fell 5 percent, worse than analysts expected. Total revenue for the four weeks that ended July 30 was almost flat at $949 million, compared with $948 million a year earlier. Gap Inc. includes the Banana Republic and Old Navy chains, outlets and smaller retail concerns, and is the country’s biggest clothing seller. Gap’s July 2011 revenue at stores open at least a year dropped 10 percent for its overseas business. In North America, revenue fell by 6 percent at Gap stores open at least a year, fell 4 percent at Banana Republic and fell 3 percent at Old Navy. Second-quarter 2011 revenue from stores open at least a year dropped 2 percent but total quarterly revenue rose 2 percent to $3.39 billion. The company needs a clear strategic plan for 2012–2014.

History In 1969, Doris and Don Fisher entered the clothing retail business with the vision of creating a unique shopping experience and offered a wide selection of styles. The idea behind the first Gap store, founded in San Francisco, was to provide fresh, casual, American style. By 1970, sales reached $2 million and the company opened its second store in San Jose, California. Six years later, in 1976, the company underwent some major changes and initiated its first public offering of 1.2 million shares of stock on the New York and Pacific Stock Exchange. The 1980s was a period of major growth and expansion. In 1980, Gap Inc. dropped Levis and other brands and began focusing on its own private label. In 1983, Gap expanded 222 SHARYNN M. TOMLIN

horizontally by acquiring Banana Republic, as well as expanding its product line and intro- ducing GapKids with the opening of its first store in San Mateo, California. A year later Gap Inc. burst into the international market and established its presence in London, England, and Vancouver, British . The same year Gap entered the European market and Gap’s annual sales reached $1 billion. From 1990 to 1999, Gap continued its progressive expansion efforts. At the turn of the de- cade in 1990, Gap opened babyGap and debuted the GapKids store in San Francisco. Two years later, Gap became the second-largest-selling apparel brand in the world. In 1993, Gap continued its global expansion by entering the French marketplace. The following year Gap introduced Old Navy, with the first store opening in Colma, California. Gap Inc. opened its 20,000-square-foot Gap stores in Tokyo in 1996. In 1998 Gap launched its first store in Alaska and established a firm foothold in all 50 states. In 2005, Gap revamped its online stores, offering more convenience and interactive shop- ping. That same year, Gap introduced Forth & Towne in Chicago and New York. The store caters to baby-boomer women, offering stylish, age-appropriate clothing that is especially appealing to their femininity and individuality. The following year, Gap added PiperLime to its online brands. In 2007, Glenn Murphy became Gap’s CEO and, within months, closed all 19 Forth & Towne stores. In 2008, the company acquired all the capital stock of Athleta Inc., a women’s sports and active apparel company based in Petaluma, California, for $148 million. For the last few years, Gap has added stores in four new countries annually.

Vision/Mission Gap has no formal vision or mission statement, but the company does have philosophy and ethics statements.

Corporate Philosophy Gap strives to be a leader in the specialty family clothing industry and has strongly espoused the importance of its customers and employees. Its statement of corporate philosophy exemplifies this concern as shown in the 2010 Annual Report: “At Gap Inc., we seek to make lasting, positive impressions on the people and communities where we operate—because we believe that doing what’s right is good for business. That means delivering value to our shareholders while working to lessen our impact on the planet, advance the rights of garment workers and ensure that our company culture is one our employees can be proud of.”1

Code of Business Ethics Gap has a well established code of ethics, translated in 65 different languages, that addresses the different aspects and guidelines about its purpose, responsibilities, laws, reporting code viola- tions, retaliation, policy changes, and waivers. The code proposes a responsible and ethical work environment for all Gap Inc. employees and directors and addresses the following most common ethical problems: conflict of interest, discrimination or harassment, workplace violence, com- plaints to government agencies, international trade regulations, bribes and improper payments, antitrust laws and selling practices, product integrity, commerical transactions, brand protection, and political contributions and activities.

Organizational Structure Gap operates from a hybrid divisional structure by geographic region and by product, as illus- trated in Exhibit 1. Some analysts think an SBU structure by region would be more effective. The total number of stores by region and brand as of January 2011 is shown in Exhibit 2. Note there are 3,231 stores, and counting.

External Issues Demographic/Economic Trends Most trends affecting the $14 trillion apparel retail industry are driven by demand from the various demographic groups and their consumer preferences. While much of the boom in retail sales is attributable to the 77 million baby boomers, there has been a shift in their purchasing  $"4& t ("1*/$‰ 223

EXHIBIT 1 The Gap’s Organizational Chart

John T. Keiser, EVP and CIO

Stan Raggio EVP. GIobal Supply Chain

Eva Sage-Gavin EVP, GlobalHuman Resources

Sabrina Simmons, EVP and Chief Financial Officer

Arthur L. Peck, President, Gap North America

Michelle Banks, General Counsel, Corporate Secretary and Chief Compliance Officer Glenn M. Murphy, Chairman and CEO Jack Calhoun President, Banana Republic

John Ermatinger, President, Asia Pacific Region

Toby Lenk, President, Gap Inc. Direct

Stephen Sunnucks, President, Europe and International Strategic Alliances

Tom Wyatt, President, OldNavy

David Zoba, SVP, Global Real Estate 224 SHARYNN M. TOMLIN

EXHIBIT 2 Number of GAP Stores, 2011

Store # of Store Locations Gap North America 1,152 Gap Europe 178 Gap Asia 120 Old Navy North America 1,039 Banana Republic North America 576 Banana Republic Asia 27 Banana Republic Europe 3 Athleta North America 1 Company-operated total stores 3,095 Franchise 136 Total 3,231

Source: Company documents.

priorities to children’s educational costs, retirement, elder care, health care, housing, and leisure activities. Although this group spends less disposable income on clothing, they still remain the biggest per capita consumers of apparel. The teen market age 15 to 19, which represents about 7.1 percent of the market, is also a powerful purchasing group for Gap and its closest competi- tors. Retailers that appeal to teens are struggling to keep them as customers as they enter young adulthood. Today, those roughly 71 million teens in the U.S. market, the “Generation Y” or “Millenials”, is the maturing market attracting the eye of retailers. Consumers age 20–34 accounted for 24 percent of the apparel spending in the first part of 2009, up 23 percent from the previous year. The United States still is suffering from relatively high unemployment rates and very low home prices, which has translated into increased levels of job insecurity among the working population. Unemployment rates in 2010 averaged 9.7 percent but are much higher in many locations, and are not expected to decline much in the next few years. The Conference Board’s Consumer Confidence Index released in the latter part of 2010 was relatively low at 54.1 but reflected a steady growth trend, and Standard & Poor’s has projected an inflation-adjusted growth of 2.6 percent for 2011. Additionally of interest to the apparel sec- tor is the projection that disposable personal income increased 3.2 percent in 2010. One often overlooked factor is the impact that rising energy prices can inflict on the apparel industry. Rising oil prices can naturally impact transportation costs, but additionally, increases in natural gas prices can affect the cost of producing pulp, which is used in the manufacturing of plastics used for packaging.2 Even though the economy may be struggling, green products appear to be maintaining their position, with the apparel and retailing industry experiencing an increase in the number of green products. Additionally, “natural” and “organic” products appear to be favorably received by consumers, but are strictly regulated by the U.S. Department of Agriculture under the standards of the National Organic Program (NOP), which states that 95 percent of the product’s content must be organic and also extends to the manufacturing process. Apparel companies continue to devote substantial sums of profits to the research and development of new and appealing products.

Global Trends As of March 2011, the United States has a consumer goods trade deficit of approximately $62.1 billion, an export growth rate of 5 percent, and an import growth of 5 percent, compared to coun- tries such as China and that have export growth rates in excess of 20 percent and strong trade surpluses. Trade restrictions, including increased tariffs or quotas, embargoes, safeguards, and customs restrictions against apparel items, as well as U.S. or foreign labor strikes, work stoppages, or boycotts, could increase the cost or reduce the supply of apparel available to the United States and adversely affect business, financial conditions, and operations. Products cur- rently manufactured in foreign countries may be subject to additional trade restrictions imposed  $"4& t ("1*/$‰ 225 by the U.S. and/or foreign governments, including the likelihood, type, or effect of any such restrictions.3 During 2010, the value of the U.S. dollar relative to other international was volatile, which impacts companies such as Gap that have substantial revenue from outside the United States. In the apparel industry, low labor cost in manufacturing is not enough to be successful for companies involved in fashion. Companies must have “sufficient product differentiation and global branding in order to demand a higher price. They must also take into consideration how much of their product to supply, since economies of scale make it less costly and more profitable to produce a greater amount; however, by producing less they can create a sense of exclusivity and additional value.”4 Given these conditions, companies such as NIKE, Inc., VF Corporation, and Levi Strauss appear to be fairing better than the average. Another concern is the rising cost of cotton and the impact on prices, particularly at Old Navy and the outlets, where there is less flexibility on pricing compared with more upscale businesses.

Pricing In mature industries like apparel, acquisitions is the only path to sales growth from the purchaser’s point of view. They also enable the acquirer to combat pricing pressures by developing multiple brands and maximizing operating efficiencies. Additionally, licensing has become a more common practice and provides a source of revenues and cost savings in manufacturing and distribution. Many consumers are obsessed with promotional pricing. For many apparel products, the consumer is willing to wait for price reductions before purchasing. Vendors, consequently, have to lower the prices at introduction and need even larger end-of-season markdowns, when they try to move inventory out of the stores to make way for new assortments. There is an increasing number of discounters and outlet stores that let prices decline, as already mentioned above.5 In the past, retailers would stock merchandise well in advance of the season in which they would be worn. Today, consumers tend to purchase as the need arises, with little consideration of advance purchases, requiring companies to be more informed about changing attitudes and pref- erences. Furthermore, while the benefit of offshore production has been greater cost efficiency, the increased lead time necessary for production has made it more difficult for manufacturers to respond to immediate customer needs. Therefore, domestic production is required to fill these more immediate changes, small orders, and seasonal or special items.

Distribution Distribution is a key factor for an apparel manufacturer. Customers demand immediate availabil- ity of apparel products and when that availability is not present, the customer will often not delay the purchase but rather will purchase substitute products. This immediacy or quick response time translates into maintaining higher levels of inventory. However, companies realize that lean inventories result in cost efficiencies that can be passed on to the customer. Accordingly, com- panies are developing new point-of-sale technologies that enable better tracking of inventory and communication between the retailer and vendor in order to supply inventory as needed. Other new technologies in the planning stage include improvements for custom production, mass customization, and Internet-based communications networks linking manufacturers to suppliers, allowing retailers to better tailor their products to the needs of the shopper. In general, there is a tendency for women’s apparel to be sold in department stores and men’s apparel in discount stores. However, as Internet applications continue to grow, it is forecast that sales through the traditional channels will decrease. The biggest issue is still that Internet purchases are intangible purchases, in that consumers cannot see, touch, and try on products they are considering buying. With the economic recovery gaining traction, the industry should benefit from resurgent consumer spending. It is expected that companies with strong brand recognition that offer fashion-right products at attractive prices will outperform the overall industry in the next years.

Competitors Gap faces strong competition from Abercrombie & Fitch Co., American Eagle, V.F. Corp., Nordstrom’s, and TJX Companies (Marshalls and TK Maxx). Additional competition is being felt from international competitors such as H & M (Sweden) and Spain’s Industrial del Diseno 226 SHARYNN M. TOMLIN

EXHIBIT 3 GAP’s Competitors

'BNJMZ$MPUIJOH3FUBJM$PNQFUJUPSTo Company Revenues (SPTT.BSHJO Net Income 1&3BUJP TJX Companies $21.9B 26.90% $1.3B 16.22% Gap Inc. 14.6B 40.16 1.20B 12.24 Nordstrom 9.7B 39.21 613M 17.55 Abercrombie & Fitch 3.4B 63.77 150M 63.40 American Eagle Outfitters 2.9B 39.46 140M 16.67

Textil SA, which owns Zara and others. Other competitors for Gap and their associated sub- sidiaries (Banana Repuplic and Old Navy) include Eddie Bauer, J. Crew, Limited Brands, Inc., Steinmart, Ann Taylor, Talbots, and Target. A summary of the major competitors and relevant financial data is shown in Exhibit 3.

Abercrombie & Fitch Co. (A&F) Founded in 1892 and headquartered in New Albany, Ohio, A&F and its subsidiaries operate as a specialty retailer in the United States and Canada. Its stores sell casual apparel, such as knit shirts, graphic T-shirts, jeans, woven shirts, and shorts, as well as personal care and other accessories for men, women, and kids under the Abercrombie & Fitch, Abercrombie, Hollister, and RUEHL brands. In addition, the company’s stores offer films, photos, postcards, desk- top images, and screen savers. A&F sells upscale men’s, women’s, and kids’ casual clothes and accessories—quite a change from when the company outfitted Ernest Hemingway and Teddy Roosevelt for safaris. A&F operates about 1,100 stores in the United States, Canada, and Europe, and also sells apparel via its catalog and online. A&F’s carefully selected college-age sales staff and use of 20-something models imbues its stores with an upscale fraternity house feel. A&F runs a fast-growing chain of some 525 teen stores called Hollister Co., and a chain targeted at boys and girls ages 7 to 14 called abercrombie kids. Its just-for-women brand, Gilly Hicks, launched in 2008 and has about 15 stores. A&F is a major rival to Gap.

American Eagle Outfitters (AEQ) Headquartered in Pittsburgh, AEQ is a mall-based retailer that sells casual apparel and accesso- ries (polos, khakis, shirts, jeans, shorts, sweaters, skirts, footwear, belts, bags) aimed at men and women ages 15–25. AEQ operates about 1,100 stores in all 50 U.S. states, , Canada, and now in the Middle East. Virtually all of AEQ’s products bear its private-label brand names: American Eagle Outfitters, aerie, and 77kids. Direct sales come from the company’s website and its AE magazine, a lifestyle publication that doubles as a catalog.

TJX Companies, Inc. TJX operates eight retail chains, including the two largest off-price clothing retailers in the United States, T.J. Maxx and Marshalls. T.J. Maxx sells brand-name family apparel, accessories, women’s shoes, domestics, giftware, and jewelry at discount prices at some 890 stores nation- wide. Marshalls offers a full line of shoes and a broader selection of menswear through 800-plus stores. TJX also owns and operates the HomeGoods chain of about 325 stores nationwide that focuses entirely on home furnishings, as well as about 160 A.J. Wright clothing stores that aim for lower-income shoppers. T.K. Maxx is the company’s European retail arm with about 265 stores in the United Kingdom, Ireland, Germany, and now Poland. TJX is the industry’s third- largest leader in sales and is widely considered the world’s number one off-price family clothing store with operations in the United States and internationally.

Nordstrom, Inc. Another industry leader is Nordstrom, Inc. Founded in 1901 by the Nordstrom family in Seattle, Washington, the company started out in the shoe business. Nordstrom’s corporate culture is anchored by the motto “Service with a Smile.” One of the nation’s largest upscale apparel and  $"4& t ("1*/$‰ 227 shoe retailers, Nordstrom sells clothes, shoes, and accessories through about 110 Nordstrom stores and about 70 off-price outlet stores (Nordstrom Rack) in some 30 states. It also operates a pair of Jeffrey luxury boutiques and a “Last Chance” clearance store, and sells goods online and through catalogs. Nordstrom recently sold its Façonnable boutiques. With its easy-return policy and touches such as thank-you notes from employees, Nordstrom has earned a reputation for top- notch customer service. Members of the Nordstrom family closely supervise the company and together own more than 15 percent of the company’s stock.

Internal Issues Gap Inc. operates over 3,200 stores worldwide and over the years has expanded through the urban- chic chain Banana Republic, budgeteer Old Navy, online-only retailer Piperlime, and Athleta, a purveyor of activewear via catalog. Other brand extensions include GapBody, GapKids, and babyGap, each with its own online incarnation. All Gap clothing is private-label merchandise made exclusively for the company.

Product Segments

GAP Gap products are sold through three channels: full-price retail stores, online, and outlet. Gap stores offer an extensive selection of classically styled, high quality, casual apparel at mod- erate price points. Products range from wardrobe basics such as denim, khakis, and T-shirts, to fashion apparel, accessories, and personal care products for men and women.

BANANA REPUBLIC Banana Republic products are sold through three channels: full-price retail stores, online, and outlet. Acquired in 1983 with two stores, Banana Republic offers sophisti- cated, fashionable collections of casual and tailored apparel, shoes, accessories, and personal care products for men and women at higher price points than Gap. It operates Banana Republic Factory Stores, which carry similar categories of products at lower price points. In 1999, the company introduced Banana Republic Online, an online store found at bananarepublic.com, which offers products comparable to those carried in the store collections, as well as extended sizes not found in stores.

OLD NAVY Old Navy products are sold through two channels: full-price retail stores and on- line. The company launched Old Navy in 1994 to address the market for value-priced family apparel. Old Navy offers a broad selection of apparel, shoes, and accessories for adults, children, and babies, as well as other items, including a maternity line, consumables, and personal care products. In 2000, it established Old Navy Online, an online store found at oldnavy.com. Old Navy Online offers apparel and accessories comparable to those carried in the store collections, as well as a plus-size line not found in stores.

PIPERLIME In 2006, the company launched Piperlime, an online-only store found at piperlime. com. Piperlime offers customers an assortment of the leading brands in footwear, handbags, ap- parel, and jewelry for women and footwear for men and kids, as well as tips, trends, and advice from leading style authorities.

ATHLETA Athleta products are sold through two channels: full-price retail stores and online. Acquired in September 2008, Athleta offers customers high quality and performance-driven women’s sports and active apparel and footwear that is stylish and functional for a variety of activities, including golf, running, skiing and snowboarding, tennis, and yoga. In May 2010, the company opened a test store in Mill Valley, California, and in January 2011, it opened a flagship store in San Francisco, California. Customers can purchase Athleta products, as well as an assortment of products from leading brands in women’s active wear, online at athleta.com, through the catalog, or in the stores.

Finance Gap’s earnings per share for 2010 improved by 19 percent, with net sales increasing by 3 percent. In 2010, the company invested more in infrastructure for growth, yet still achieved the highest operating margin in a decade at 13.4 percent. Its commitment to return cash to shareholders through share repurchases and dividends resulted in the distribution of $2.2 billion in 2010. 228 SHARYNN M. TOMLIN

Gap reported an 8 percent increase in same-store sales for the four-week period ended April 30, 2011. Results for that month compared favorably with same-store sales for the four-week period the prior year, which were 2 percent less. Gap reported an improvement in same-store sales in every region where it operates. The company’s same-store sales in the regions such as Old Navy North America and Banana Republic North America saw a double-digit growth of 14 percent and 11 percent for that month. Gap’s North America region reported a positive 2 percent growth in same-store sales versus a negative 6 percent in the prior-year period. The company’s same-store sales from the international region reported a negative 1 percent growth versus negative 5 percent last year. Net sales for the four-week period ended April 30, 2011, were up 9.5 percent to $1.15 billion compared with net sales of $1.05 billion for the same four-week period the prior year. Gap completed its first-quarter 2011 with a decline of 3 percent in same-store sales com- pared with an increase of 5 percent in the prior-year quarter. During that first 2011 quarter, Gap has reported a decline in same-store sales in every region where it operates. The company’s same-store sales in the regions North America, Banana Republic North America, Old Navy North America, and International all reported a negative growth of 3 percent, 1 percent, 2 per- cent, and 6 percent, respectively. Gap’s sales for the first quarter of 2011 were down 1 percent to $3.30 billion compared with sales of $3.33 billion in the prior-year quarter. Gap’s recent income statements and balance sheets are provided in Exhibit 4 and 5 respectively. Gap’s by-segment revenues for 2011 by brand and region are provided in Exhibit 6.

EXHIBIT 4 GAP Income Statement 2009–2011 (000 omitted)

   Net sales $14,664,000 14,197,000 14,526,000 Cost of goods sold & occupancy expenses 8,775,000 8,473,000 9,079,000 Gross 5,889,000 5,724,000 5,447,000 Operating expenses 3,921,000 3,909,000 3,899,000 Operating income 1,968,000 1,815,000 1,548,000 Interest expense (reversal) (8,000) 6,000 1,000 Interest income 6,000 7,000 37,000 Earnings from continuing operations before income 1,686,000 1,511,000 1,209,000 taxes - United States Earnings from continuing operations before income 296,000 305,000 375,000 taxes - foreign Earnings from continuing operations before 1,982,000 1,816,000 1,584,000 income taxes Current provision (benefit) for income taxes - federal 476,000 572,000 440,000 Current provision (benefit) for income taxes - state 75,000 78,000 43,000 Current provision (benefit) for income taxes - foreign 134,000 114,000 124,000 Total current provision (benefit) for income taxes 685,000 764,000 607,000 Deferred provision (benefit) for income taxes - federal 94,000 (43,000) 5,000 Deferred provision (benefit) for income taxes - state (5,000) (10,000) 5,000 Deferred provision (benefit) for income taxes - foreign 4,000 3,000 – Total deferred provision (benefit) for income taxes 93,000 (50,000) 10,000 Income taxes 778,000 714,000 617,000 Earnings (loss) from continuing operations, net of – 1,102,000 967,000 income taxes Net earnings (loss) $1,204,000 1,102,000 967,000 Weighted average shares outstanding - basic 636,000 694,000 716,000 Weighted average shares outstanding - diluted 641,000 699,000 719,000 Year-end shares outstanding 588,000 676,000 694,000 (continued)  $"4& t ("1*/$‰ 229

EXHIBIT 4 continued

   Earnings (loss) per share - continuing operations - basic – 1.59 1.35 Net earnings (loss) per share – basic 1.89 1.59 1.35 Earnings (loss) per share - continuing operations - diluted – 1.58 1.34 Net earnings (loss) per share - diluted 1.88 1.58 1.34 Cash dividends declared & paid per share 0.4 0.34 0.34 Total number of employees 134,000 135,000 134,000 Number of common stockholders 8,644,000 8,903,000 9,236,000

Source: Company documents.

EXHIBIT 5 GAP Balance Sheet 2009–2011 (000 omitted)

   ASSETS Cash $957,000 1,279,000 1,195,000 Domestic commercial paper 75,000 590,000 275,000 Bank certificates of deposit & time deposits 529,000 479,000 245,000 Total cash equivalents 604,000 1,069,000 520,000 Cash & cash equivalents 1,561,000 2,348,000 1,715,000 Short-term investments 100,000 225,000 – Restricted cash – 18,000 41,000 Merchandise inventory 1,620,000 1,477,000 1,506,000 Accounts receivable 205,000 – – Current portion of deferred tax assets 190,000 193,000 – Prepaid minimum rent & occupancy expenses 142,000 140,000 – Restricted cash 7,000 – – Prepaid catalog expenses 3,000 1,000 – Derivative financial instruments 2,000 – – Prepaid expenses – 119,000 – Other current assets 96,000 143,000 – Other current assets 645,000 596,000 – Other current assets – – 743,000 TOTAL CURRENT ASSETS 3,926,000 4,664,000 4,005,000

Leasehold improvements 3,066,000 3,013,000 3,026,000 Furniture & equipment 2,431,000 2,417,000 2,377,000 Land & buildings – – 988,000 Land, buildings, & building improvements 1,093,000 1,086,000 – Software 909,000 832,000 774,000 Construction-in-progress 74,000 79,000 80,000 Property & equipment, at cost 7,573,000 7,427,000 7,245,000 Less: accumulated depreciation 5,010,000 4,799,000 4,312,000 Property & equipment, net 2,563,000 2,628,000 2,933,000 Long-term tax-related assets 259,000 392,000 326,000 Goodwill 99,000 99,000 99,000 Trade name 54,000 54,000 54,000 230 SHARYNN M. TOMLIN

   Deferred compensation plan assets 27,000 21,000 18,000 Lease rights & key money, gross – – 156,000 Less: accumulated amortization - lease rights & key money – – 125,000 Lease rights & key money, net 20,000 26,000 31,000 Restricted cash 11,000 – – Intangible assets subject to amortization 3,000 7,000 13,000 Derivative financial instruments 2,000 – – Other long-term assets 101,000 94,000 85,000 Other long-term assets 576,000 693,000 626,000 TOTAL ASSETS $7,065,000 7,985,000 7,564,000

LIABILITIES Current maturities of long-term debt – – 50,000 Accounts payable 1,049,000 1,027,000 975,000 Accrued compensation & benefits 280,000 340,000 327,000 Unredeemed gift cards, gift certificates, & credit vouchers, 233,000 244,000 255,000 net of breakage Short-term deferred rent & tenant allowances 99,000 105,000 105,000 Workers’ compensation liability 50,000 46,000 39,000 Derivative financial instruments 35,000 27,000 41,000 Accrued advertising 25,000 29,000 15,000 General insurance liability 22,000 23,000 25,000 Sales return allowance 22,000 22,000 21,000 Credit card reward certificates liability 17,000 16,000 16,000 Other accrued expenses & current liabilities 213,000 211,000 232,000 Accrued expenses & other current liabilities 996,000 1,063,000 1,076,000 Income taxes payable 50,000 41,000 57,000 TOTAL CURRENT LIABILITIES 2,095,000 2,131,000 2,158,000 Long-term deferred rent & tenant allowances 717,000 716,000 772,000 Long-term tax-related liabilities 100,000 181,000 174,000 Asset retirement obligations 37,000 33,000 33,000 Deferred compensation plan liabilities 27,000 22,000 18,000 Derivative financial instruments 2,000 – 11,000 Other long-term liabilities 7,000 11,000 11,000 LONG-TERM LIABILITIES 890,000 963,000 1,019,000 TOTAL LIABILITIES 2,985,000 3,094,000 3,177,000

SHAREHOLDERS’ EQUITY Common stock 55,000 55,000 55,000 Additional paid-in capital 2,939,000 2,935,000 2,895,000 Retained earnings 11,767,000 10,815,000 9,947,000 Foreign translation, net of tax 205,000 168,000 109,000 Accumulated changes in fair value of derivative financial (20,000) (13,000) 14,000 instruments, net of tax Accumulated other comprehensive earnings (loss) 185,000 155,000 123,000 Treasury stock, at cost 10,866,000 9,069,000 8,633,000 Total stockholders’ equity 4,080,000 4,891,000 4,387,000 TOTAL LIABILITIES & SE $7,065,000 7,985,000 7,564,000

Source: Company documents.  $"4& t ("1*/$‰ 231

EXHIBIT 6 GAP Revenues by Product Brand and Region

'JTDBM:FBS ($ in millions) Banana 1FSDFOUBHF Brand ("1 Old Navy Republic Other Total of Net Sales Region U.S. $3,454 $4,945 $2,084 -0- $10,483 71% Canada 341 427 190 -0- 958 7 Europe 703 -0- 36 47 786.5 5 Asia 872 -0- 118 59 1,049 7 Other Regions -0- -0- -0- 89 89 1 Total Stores reportable segment 5,370 5,372 2,428 195 13,365 91 Direct reportable sement 365 533 155 246 1,299 9 Total $5,735 $5,905 $2,583 $ 441 $14,664 100%

Source: Gap Annual Report, 2010.

Marketing Gap’s marketing strategy is to reconnect with customers globally across each brand through product, place, price, and promotion. An example is the recent announcement that Visa Inc., a global leader in payments, is working with Gap to deliver real-time discounts and promotions to consumers via SMS text messages. Gap customers who opt-in to participate in the service are notified of money-saving discounts or promotions in real-time while shopping.6 Additional technology-based marketing includes Facebook, which has created a platform for retailers, including the Gap, to offer deals to customers who are in the vicinity of store locations. The new “Deals” feature builds on the recently launched Places—which lets users broadcast their location, among other things—and allows merchants to direct special offers to Facebook mobile users who check in within the vicinity of their stores.7 Gap’s marketing strategy is to continue reaching new customers by expanding locally and internationally. Over the past five years, Gap’s European and franchise store base has more than doubled from 165 to 367 in 31 countries, with online sales available to custom- ers in over 90 countries.8 One major area of interest is exploring opportunities in China and pursuing franchising options in more fragmented markets such as those in Central and Eastern Europe. Promotionally, Gap is well known for its inventive marketing using black-and-white images and celebrities in both print and visual media and sponsoring commercial projects such as Bravo Network’s Project Runway and Sony Film’s Memoirs of a Geisha. Old Navy stores were upgraded, along with their visual merchandising, and supported by creative marketing. Gap stores have enhanced their lighting and added new fixtures. Another major improvement is the new online system, which was reported by as one of “the best e-commerce sites in retail.” The concept was quickly adopted by customers and became one of the largest online apparel retailers in the United States. The websites offer more interactive experience for shoppers, including a service that will recommend clothing choices based on an individual customer’s preferences and size. Gap continues to enhance its websites and launch new features.

Conclusion “We have to be more of a consistent performer,” CEO Glenn Murphy said, speaking at Gap’s annual shareholder meeting in San Francisco in 2011. In fiscal 2010, which ended in January, Gap North America was the only division of the company to experience a decline in same-store sales, which declined 1 percent. In the first quarter of 2011, same-store sales were negative at all Gap divisions, including Old Navy and Banana Republic. Gap’s sales in 2010 totaled $14.7 billion, or 7.9 percent below 2006 levels, leading the company to increasingly turn to overseas 232 SHARYNN M. TOMLIN

markets for growth. Only 328 out of its 3,095 stores as of January were outside the United States. Gap opened stores in China in 2010 and opened another 10 stores that country in 2011. The company introduced its outlet concept to Italy in 2011 and China in 2012. Gap, Inc. needs a clear strategic plan. Rival companies are doing considerably better than Gap, Inc. Prepare a strategic plan for Mr. Murphy.

Notes 1. GAP Annual Report, 2010. 5. Standard & Poor’s Industry Surveys: Apparel 2. Standard & Poor’s, Industry Surveys – Household and Footwear, 2004. Nondurables, December 30, 2010. 6. Marketing Weekly News, May 7, 2011, p 333. 3. http://www.researchandmarkets.com/reports. 7. Billboard, Nov 13, 2010, v122, i45, p. 5(1). 4. Ibid. 8. Gap Annual Report, 2010.