Running head: FINANCIAL CASE STUDY 1
Financial Case Study for The Gap Inc.
Marina Nagornaya
The University of Winnipeg
September 18, 2019
FINANCIAL CASE STUDY 2
The brief history of The Gap Inc.
On August 21st, 2019 The Gap Inc celebrates 50 years of its success and growth. In 1969,
Donald Fisher was a 40-year-old real estate professional who could not find fit Levi's jeans that fit him, so he found a solution and created the Gap. The first store of the retail chain opened on Ocean
Avenue in San Francisco. "For three months, the new store, named by Ms. Fisher in a nod to the generation gap, sold Levi's, especially in difficult-to-find sizes, and records" (Bromwich, 2019).
At the beginning of its growth, the store originally sold only jeans from Levi Strauss & Co. and vinyl records. Then the situation on the market has changed, demand for jeans was slowing, and it was evident that the company need to focus on something fresh and new. People looked for something casual in great colours at a good price. So the company decided to redesign its stores.
Moreover, as Bromwich (2019) mentions, in 1974 the company released its private label clothing.
"The company went public as Gap Inc. on May 19, 1976" (Kim, 2019). "Well-known artists like
Miles Davis, Marilyn Monroe, Jack Kerouac, Pablo Picasso and Andy Warhol appeared in advertisements, linking creative iconography to the Gap heritage" (Bromwich, 2019). In 1986, the first GapKids store opened in San Mateo, California. According to Barmash (1991), In 1987 The
Gap Inc. shifted from a focus on unisex clothing and lunched its first separate collections for men and women. At the same time, the Gap Inc started its international expansion. "The first location outside of the US was in London in 1987. It opened up the first Gap in Canada in Vancouver in
1989, and a decade later, its first French flagship store opened on the Champs-Élysées in Paris"
(Kim, 2019). In late 2010 The Gap entered the Chinese market, it opened stores in Beijing and
Shanghai and brought an online shopping experience to all Chinese consumers as well (The Gap
Inc., 2010, para.1). According to the Gap Inc website, "over the last 50 years, the company has grown from a single store to a global fashion business with seven brands — Gap, Banana Republic,
FINANCIAL CASE STUDY 3
Old Navy, Athleta, Intermix, Hill City, and Janie and Jack. Gap's clothes are available in 90 countries worldwide through over 3,100 company-operated stores, almost 400 franchise stores, and e-commerce sites and is still growing" (para. 1). The brands were launched or acquired by the company step by step. The first addition was Banana Republic, and it was acquired in 1983. In almost a decade, The Gap Inc created its cheaper version and named it Old Navy. The first store was opened in 1994 in Colma, California. Old Navy brand has succeeded in its profitability and has become an independent company several months earlier this year. In 2008, The Gap Inc. acquired Athleta, and then bought Intermix five years later. In 2018 Hill City was launched, and the company acquired Janie & Jack from Gymboree earlier in 2019 as well (Kim, 2019).
The industry, sectors and markets the Gap Inc. operates in.
According to the Gap Inc. 2018 annual report, it is an international specialty retailer operating retail and outlet stores. The company sells casual apparel, accessories, and personal care products for men, women, and children (p.1). It also states, that Gap Inc. is “an omni-channel retailer, with sales to customers both in stores and online, through Company-operated and franchise stores, websites, and third-party arrangements” (Gap Inc., 2018, p. 2). The company has not just company-operated stores in the United States, Canada, the United Kingdom, France,
Ireland, Japan, Italy, China, Hong Kong, Taiwan, and Mexico, but also has franchise agreements with unaffiliated franchisees to operate Old Navy, Gap, and Banana Republic stores throughout
Asia, Europe, Latin America, the Middle East, and Africa.
Summary of the health of the company.
According to the annual 2018 report, The Gap Inc. showed the sales growth from $15,797 million in 2015 to $16,580 million in 2018 (p.19). The comparison of sales during the last four years shows that there was a stable increase in sales at Old Navy and a progressive decrease in net
FINANCIAL CASE STUDY 4 sales for Gap Global. Led by MIT engineers and Wall Street analysts, Trefis Team (2019) appoints, that "Gap has added $1.06 billion to total revenue since 2016, growing at an average annual rate of 3.4%. This growth has been driven almost completely by Old Navy, which contributed more than 95% of the revenue growth over this period". However, in 2018 the company also mentioned another reason of growth, stated that "our net sales for fiscal 2018 increased $725 million, or 5 percent, compared with fiscal 2017, primarily driven by the impact of significant presentation changes of $619 million resulting from the adoption of the new revenue recognition standard"
(Gap Inc, 2018, p.25). Trefis (2018) in its analysis of the second-quarter results of 2018, took up a position that "Gap brand continues to remain a drag on the company". Trefis Team (2019) also shows in their another report, that "Comparable sales is a key metric that is used to determine the performance of a company in the apparel industry. Gap's second-largest brand, Gap Global, has constantly delivered negative comparable sales growth in the last three years, with this key metric declining by 3% in 2016 and 5% in 2018".
The situation in 2019 is different - Gap's second-quarter sales fall short of estimates. As a reporter for CNBC in New York highlights, "the sales at all Gap Inc. stores operating for at least
12 months and its websites were down 4%, worse than an anticipated decline of 3.1%. A year ago, same-store sales climbed 2%" (Thomas L, 2019). Zacks Equity Research (2019) notes that "the brand is witnessing traffic challenges as well as assortment issues and operational headwinds. This has also been hurting the company's overall comparable sales (comps) and top-line performance".
According to the annual reports published by The Gap Inc. between 2016-2019 years, the workforce dropped significantly for approximate 6,000 employees. "As of January 30, 2016, the approximate number of employees was 141,000" (Gap Inc., 20017, p.3). "As of February 2, 2019, we had a workforce of approximately 135,000 employees, which includes a combination of part-
FINANCIAL CASE STUDY 5 time and full-time employees. We also hire seasonal employees, primarily during the peak holiday selling season" (Gap Inc., 2019, p.3). The number of outlets was changed from 3,275 Company- operated stores and 446 franchise store locations in 2015 to 3,194 and 472 accordingly at the end of fiscal 2018 (Gap Inc., 2018, p.2). As the annual reports stated, most of the closing stores referred to the stores of two brands: Gap and Banana Republic.
The current main strategy of the Gap Inc. is to separate the brand Old Navy, which has continued to deliver growth and profitability, from its portfolio and create two publicly traded companies. In February 2019 The Gap Inc. announced "plans to create two independent publicly traded companies: Old Navy, a category-leader in family apparel, and a yet-to-benamed company
("NewCo"), which will consist of the iconic Gap brand, Athleta, Banana Republic, Intermix and
Hill City"(press release). Earlier in August of this year, the company announced, that "the new public company, currently referred to as NewCo, will retain the Gap Inc. name" (Gap Inc., 2019, para. 1). The strategy seems not to be a big surprise for most of analytics as the Old Navy was always the most successful and profitable brand among the Gap's portfolio, as it was mentioned earlier in this study. Trefis (2019) analyses the announcement and states that "the company plans to unlock significant value by spinning-off its star brand. The spin-off will also help the new company to focus on its struggling Gap Global brand by better allocating resources and developing tailored strategies for the brand". Also, the separation of the brand two new companies to target different audiences more efficiently. According to the Zacks Equity Research (2019), "Gap's iconic
Old Navy brand expects to double its present brick-and-mortar footprint in North America and focus on smaller markets. While Gap plans to expand Athleta, and Janie and Jack operations outside the United States through franchisees".
FINANCIAL CASE STUDY 6
Along with the separation of the Old Navy brand, the fleet restructuring will follow, and
Gap Inc. announced that about 230 Gap specialty stores would be closed over the next two years.
The company highlighted that "the remaining specialty fleet will serve as a more appropriate foundation for future growth of the brand across the specialty, outlet and online channels. There will be a healthier channel mix after the restructuring, with nearly 40% of sales coming from online, and the remainder split fairly evenly between the specialty and value channels" (Press
Release Gap Inc. Reports Fourth Quarter and Fiscal Year 2018 Results, 2019).
At the same time, the company would like to concentrate on enhancing positions of steadily decreasing in sales Gap brand. The expected initiatives to revitalize the Gap brand are as follows:
"re-engaging with customers and expanding its loyal customer base, leveraging the multigenerational, democratic appeal of the brand. Improving the product by recapturing the traditional Gap attributes of style, quality, fit and value is a top priority. The company intends to modernize its marketing model to efficiently build engagement and loyalty" (2019).
Among significant factors that currently affect the company, it is essential to highlight new regulations concerning the new revenue recognition model, labour aspects and environmental factors.
According to PricewaterhouseCoopers, a multinational professional services network,
"sweeping changes in the FASB's new revenue recognition model became effective Q1 2018 for most calendar year-end public business entities (PBEs), and will become effective in 2019 for non-
PBEs". Indeed, the Gap Inc. announced that it adopted this standard in the first quarter of fiscal
2018. It also states that it had a significant impact on the certain line items within the Consolidated
Statements of Income. Changes did not have a significant impact to operating income, net income
FINANCIAL CASE STUDY 7 or earnings per share, but mostly were related to the revenue of gift cards and the company's credit card programs. (Gap Inc., 2019, para 16).
Equal rights and the empowerment of women led the Gap Inc. to create P.A.C.E.. P.A.C.E. stands for Personal Advancement & Career Enhancement and is the program designed to empower the women working in the Gap Inc.'s factories. It has provided foundational life skills and technical training to 200,000 women in 16 countries since 2007. In 2019 Gap Inc. was once again included in the Bloomberg Gender-Equality Index for a commitment to transparency in gender reporting and advancing women's equality (Gap Inc., 2019, para. 2).
Another major factor that affects the company is environmental issues. According to the
United Nations Young Champion of the Earth Kaya Dorey (2018), "big brands are starting to take notice: Nike, H&M, Burberry, and Gap have all recently signed up to the Make Fashion Circular initiative. It aims to improve the industry's record on sustainability and reduce global waste from fashion by recycling raw materials and products". The Gap Inc.'s main initiatives include: the goal to use 100% sustainable cotton, converting plastic bottles into performance fabrics, improving energy efficiency at their stores, offices, and distribution networks, expanding the investments in renewables, water stewardship, reducing deforestation, reducing the waste footprint. The Gap Inc. integrate sustainability into every aspect of their business, "from the materials we source, to the suppliers that we work with, and ultimately the clothes that we all wear" (Gap Inc., 2018, para. 1).
The Gap Inc. announced to source cotton that is organic, recycled, and verified American or
Australian grown. It also committed to work with the suppliers that make their products to save 10 billion litres of water by the end of 2020. The company also states that it will eliminate the use of any wood-derived fabrics (like rayon, viscose, lyocell, and modal) made from the pulp from ancient and endangered forests. One of the Gap Inc.'s brands - Athleta set the goal to use 80% of
FINANCIAL CASE STUDY 8 their fabrications to be made with recycled material by 2020. "As a company, the biggest waste streams coming from our owned-and-operated facilities are plastic hangers and polyethylene bags.
Since many of our facilities are within larger mall complexes, we're looking for scalable solutions that address the diverse needs of our stores and distribution centers" (Gap Inc., 2018, para. 11).
FINANCIAL CASE STUDY 9
References
Barmash, I. (1991, June 24). Gap finds middle road to success. The New York Times. Retrieved
from https://www.nytimes.com
Bromwich, J. E. (2019, September 17). Was the Gap ever cool? A look at 50 years in denim and
khaki. The New York Times. Retrieved from https://www.nytimes.com
Dory, K. (2018, 27 June). Why fast fashion needs to slow down. [web log comment]. Retrieved
from https://www.unenvironment.org/news-and-stories/blogpost/why-fast-fashion-needs-
slow-down
Gap Inc. (2010, June 23). Gap Inc. outlines comprehensive China market entry plans, starting
with four Gap brand stores and online shopping site in 2010. [Press Release]. Retrieved
from https://www.gapinc.com/content/gapinc/html/media/pressrelease/2010/med_pr_
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Gap Inc. (2016, March 21). 2015 annual report. Retrieved from http://www.annualreports.com/
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Gap Inc. (2019, February 19). Banana Republic celebrates International Women’s Day with its
first Equality Capsule. [Press Release]. Retrieved from https://www.gapinc.com/content/
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‘challenging environment’. Cnbc.com. Retrieved from https://www.cnbc.com/2019/08/
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Trefis Team. (2018, August 24). Gap brand continues to remain a drag on the company.
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