A stronger focus on work-appropriate apparel versus comfy athleisure, correcting supply-chain and inventory issues and fixing its executive leadership vacuum are key goals that Gap Inc. aims to reach next.
The retail giant—which includes its namesake brand, Old Navy, Banana Republic and Athleta—outlined its plans in a Q2 earnings call on Thursday led by interim CEO Bobby Martin and CFO Katrina O’Connell. The two responded to somewhat negative Q2 numbers that saw net sales fall 8 percent to $3.86 billion (7 percent on a constant currency basis) and the withdrawal of its prior 2022 fiscal outlook. While Gap and Old Navy sales dropped 10 percent and 13 percent respectively, Athleta’s rose 1 percent and the more upscale and dressier Banana Republic brand’s escalated by 9 percent.
“To change the trajectory of our business, we need to take action,” Martin said. “There are brands in our portfolio that are underperforming today. And like many other companies, the macro environment is testing us with simultaneous shifts in consumer behavior and increased cost pressures.”
The altered customer actions he mentioned include a renewed preference and need for post-pandemic clothing that can be worn in one’s workplace or at newly resurrected social occasions. “What hasn’t been working really, not just with Old Navy, but in general, is a shift away from the cozier categories like active and fleece as well as like T-shirts and casual shorts,” O’Connell said. “And so that’s less about the product not being great and more about the fact that the consumer, as you know, is really buying a lot less of that this year and really wanting to spend more on things like dresses, pants, even dressier denim and woven tops, things that she can wear out to parties or to work. And so the pivot that we’ve been making at Old Navy, but also at Gap is really less of those casual categories and more of the going-out categories.”
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However, she stressed that making both stores’ assortments slightly less casual will not involve a radical makeover. “Certainly, we don’t expect to broadly pivot the brands’ DNA. I think by nature, those are casual brands, and that’s how they’ve won,” she noted. “That said, there are lots of elements within each of those brands, whether you think of dressed-up denim or pants like the pixie pants, or khakis at Gap, woven tops, outerwear, even sweaters that we believe we can put together into versatile looks that should take [the customer] from day to night.”
“And so think that’s the commitment that the team has is in the near term, they’ve been working on really rebalancing out of the casual into more of those looks,” she continued. “I think we all know that, right now, we have a little bit of a whipsaw from casual into work, and we want to be careful to keep the balanced DNA of both of those brands because I think we can win with both elements of products. So, we’ll stay balanced, but certainly, we’ll be showcasing that more versus dressed up look as we head into the back half of the year.”
“The team remains focused on adding balance and relevance to the assortment with broader end use, particularly dresses, pants, denim, woven tops and improved fashion choices, which we believe will begin to see this fall and even more into holiday,” she said regarding Old Navy specifically.
“We remain bullish on Old Navy’s particular for growth by delivering the democracy of style and service to a wide range of consumers. Old Navy is the number two brand in apparel market share according to NPD Research, and that remains our foothold for acceleration and expansion,” Martin said.
Despite the overall dressier trend, the company won’t be downplaying the active and athleisure categories, which are still very profitable. “Active continues to be a massive business at Old Navy. They’re dominant shareholders of active–and which is the true statement for Athleta as well. They continue to do a significant amount of their business out of active,” O’Connell said. “I think what we’re seeing in both of those businesses or all of our businesses is really just a step back off of last year’s massive growth based on the shift of the consumer now towards workwear. But Old Navy’s active business is still quite large and important and still quite healthy, just not as big growth as we had planned for before we saw this big shift in the consumer demand.”
The pair also admitted that Old Navy in particular has been plagued with inventory, sizing and supply-chain issues which caused the conglomerate to write off $58 million in unproductive inventory in the quarter. “As you know, we’ve been navigating through product lateness and product acceptance issues, most notably at Old Navy, which has forced us to increase the level of discounting in an effort to better balance our assortment,” O’Connell said.
“We have vendor-managed inventory, which means we’re working closer with our vendors to buy inventory on a more regular basis, and they hold it for us, and we pull it as opposed to buying so much in advance. And then platforming a fabric with our vendors that allows us to chase into styles and colors as we read the consumer. So those are a couple of examples of where we’ll get speed and flexibility back,” she added. “But those levers, as you can imagine, when the manufacturing base was so disrupted, we’re just not at our ability to leverage. So we’re looking forward to getting that back as the manufacturing base has stabilized.”
Martin and O’Connell also acknowledged that C-suite changes have affected performance. Last month the Gap Inc.’s CEO Sonia Syngal stepped down and Horacio “Haio” Barbeito was named as the head of Old Navy, replacing Nancy Green who departed in April. “Understanding value and executing in the format that Old Navy serves, I think we’ll see him [Barbeito] really strengthen a lot of the category execution and so forth and make sure that we rightsize the assortment,” Martin said. “We’re going to have to give him time. He’s right now focusing on the next two quarters while also looking at the commitments and plans and product for spring and summer ahead.”
He also said that the active search for a new CEO continues. “The Board is actively evaluating potential candidates, working swiftly and thoughtfully to ensure that we find the most qualified person for this role. We are focused on someone who can lead Gap Inc. from defense to offense, vitalize our creators while returning us to a position where we are gaining market share across our brands, a leader who can build upon the company’s strong foundation, powerful assets, well-established values to further sell our omni platform and market leadership.
“Ultimately, [we need] a leader focused on delighting our customers through every experience and driving the change and momentum necessary to deliver value creation for our people and our shareholders over the long term,” Martin said.