3 things Gap needs to fix to turn around its struggling business

A pedestrian walks past a Gap Inc. store. in Miami Beach, Florida.

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Gap needs a new game plan—and fast.

In April, the retailer announced the departure of the head of its Old Navy business, which has been hit by marketing missteps and supply chain grumbling after driving the company’s growth during the pandemic.

Then, in July, Gap CEO Sonia Singhal abruptly stepped down after about two years on the job as sales continued to fall and challenges mounted.

Gap has since hired a new leader for Old Navy, who took over earlier this month. But it still needs a permanent leader to steer the overarching business — which includes its namesake brand Banana Republic and Athleta — back to growing revenue.

Gap is due to report its fiscal second-quarter results Thursday afternoon, and the company said it expects sales for the period to decline by a high single-digit percentage from a year earlier.

Sharp markdowns to clear bloated inventory are expected to hurt gross margins, with Gap forecasting its adjusted operating margin in the quarter to be flat to slightly negative.

Analysts forecast the company would post a loss of five cents per share on sales of $3.82 billion, according to Refinitiv estimates. This would represent a 9% drop in revenue compared to the previous period.

Gap shares are down more than 40% so far this year as of Tuesday’s market close.

Dana Telsey, chief executive of Telsey Advisory Group, described the company as suffering from “fluctuating performance across brands, uncertainty in leadership and direction and no visibility towards stabilization with a clear recovery plan”.

Here are three things Gap needs to get its business in better shape.

1. Find a CEO

The company has been without a leader since Syngal left last month, casting uncertainty over its future.

Bob Martin, Gap’s executive chairman, is serving as interim president and CEO, with Syngal assisting for a brief transition period. But analysts and investors want to see a permanent replacement with a strong track record.

Jane Hali & Associates retail analyst Jessica Ramirez said she would like to see a CEO with a strong background in retail merchandising to push the company toward innovation — particularly at its Banana Republic division, which she says it needs to find a new identity emerging from the pandemic.

Banana Republic, once a workwear destination, is trying to adapt as more people work from home or opt for more relaxed styles.

“Gap seems to be consistently missing what the consumer is looking for,” Ramirez said. “There’s something that just won’t stick.”

2. Get Old Navy back on track

Old Navy, known for its budget-friendly apparel for kids and adults, is critical to Gap’s success and will account for more than half of the company’s $16.7 billion in fiscal 2021 global net sales.

The business was in such a slump that in 2019 Gap said it would spin off Old Navy into a separate publicly traded company. But those plans were scrapped in January 2020, with the company saying its performance had been dampened and that the costs of completing such a split would outweigh the benefits.

Then the Covid-19 pandemic hit and even bigger cracks began to form.

Old Navy’s net sales in the three months ended April 30 fell 19% from a year earlier to $1.8 billion. Same-store sales, which track revenue online and at stores open at least 12 months, fell a whopping 22%.

Gap attributed the losses to sizing and assortment imbalances due to continued inventory delays. He also acknowledged that the drive to sell more plus-size items at Old Navy has resulted in the retailer carrying too many of its extended sizes and not enough of its core sizes.

In July, Deutsche Bank downgraded Gap’s stock to “hold” from “buy” due to “low visibility” around the top-line recovery at Old Navy. Increased promotions in apparel are also likely to have a negative impact on Old Navy, it said.

Earlier this month, Horacio “Hayo” Barbeyto — most recently president and CEO of Walmart Canada — took over as head of the business.

3. Prove the Yeezy Bet

It was June 2020 when rapper Kanye West first announced that he would be collaborating with Gap on a clothing line under the Yeezy name. More than two years later, it’s unclear how much the Yeezy gear will move the needle for Gap, if at all.

The first item in the highly anticipated Yeezy Gap line, a $200 nylon down jacket, didn’t go on sale online until June 2021. But then in November, Syngal told analysts on an earnings call that one of the Yeezy hoodies has the most the highest price-day online sales in Gap history.

The pieces, which have since debuted through a partnership with luxury fashion house Balenciaga, are mostly unisex in shape and monochromatic in style: the $340 parka, the $120 three-quarter-sleeve Y-shirt, and the $300 jumpsuit.

Gap recently began selling the products in some of its stores, including the flagship store in New York’s Times Square. But the display of giant trash bags filled with Yeezy Gap merchandise in malls across the country created confusion and was mocked online.

A Gap representative did not respond to CNBC’s request for comment on the display.

An analyst at Wells Fargo had estimated that the Yeezy line would add roughly $1 billion in additional revenue to Gap. But West’s creations should get people to spend money once they get fans in stores.

“No matter what Kanye does, people will follow Kanye. He can get people in the door,” Ramirez said. “But if the actual Gap assortment isn’t something consumers want to stick with, they won’t.”

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