Admitting “this is a pivotal time for the company,” Robert Fisher, interim president and CEO of Gap Inc., said he has created an executive committee that will streamline operating decisions and drive better accountability.
Fisher, who has been with the company for 35 years and took the helm this month after Art Peck stepped down as CEO and non-executive chairman, said, “While I’m confident about our future, I’m also realistic about the challenges ahead. Clearly our brands are underperforming today and have been pressured by uneven execution. The diverging priorities of our two largest brands, coupled with the overall complexity that has been building up in the organization over time, has led to a lack of focus, operational discipline and efficiency in many areas.”
To ensure the business is being assessed properly and that the difficult decisions are being made and necessary actions are being taken to improve operational execution, Fisher has named Sonia Syngal and Mark Breitbard to be responsible for brand leadership. In addition, Teri List-Stoll, executive vice president and chief financial officer, will add operational oversight to her role, and global general counsel Julie Gruber will consolidate administrative oversight. Syngal is president and CEO of Old Navy and Breitbard is president and CEO of Banana Republic.
“We’re fortunate that a strong bench of talented leaders supporting me in driving operational excellence and greater efficiency that will help position us for improved profitability,” Fisher told analysts on a conference call to discuss third-quarter results.
“To that end, the board and I continue to believe in the strategic rationale of the separation and the benefits it is expected to provide,” he said, referring to the planned spin-off of Old Navy as a separate publicly traded company.
Separating Gap Inc. and Old Navy will better serve their two distinct customer sets, each with an operating model tailored to their respective business needs, Fisher noted. Old Navy is competing with companies that have a singular focus on the value space, he said, and “we need Sonia and her team to have that same focus.”
“Second, the separation will be a catalyst to drive improved cost and efficiency as we rebuild the organizational structure and operating models for both companies,” said Fisher, who has also served on the board since 1990 and is the son of Gap co-founders Donald and Doris Fisher.
“Both companies will benefit from this,” Fisher continued, “but new Gap Inc. in particular will have renewed urgency and catalyst to reinvent how it operates. Third, and perhaps most importantly, the separation will better empower each company to fully embark upon its unique path for growth, and in the case of our mature brands, path towards enhanced profitability.”
The difficult third quarter ended Nov. 2 saw sales decline 2 percent to $4 billion and comparable sales fall 4 percent versus last year. Net income in the period dropped 47.4 percent to $140 million.
Old Navy leans in
List said traffic trends remained soft across the brands, along with continued product acceptance challenges, particularly at Old Navy. However, “traffic rebounds typically lag product acceptance improvement,” she noted.
“With regards to product, while we believe we have correctly diagnosed our women’s product issues, we have identified opportunities for better execution, particularly in the areas of marketing and merchandising,” List sad.
“Looking ahead, we have an opportunity to better execute on Old Navy’s unique value equation and positioning, with style, fit, quality and price, all working in balance,” she said. “It’s also important to note that three key categories we began leaning into this fall–denim, fleece and active–continue to outperform the overall brand in terms of sales and margin comps, and we have gained market share in denim.”
The company has also decided to exit Old Navy from China in early 2020 since, List said, because “the investment needed to grow the business would be significant and we see greater value creation opportunities by focusing on other higher returns strategies, such as increasing our digital capability and continuing to invest in the proven growth opportunity in underserved North American market.”
Gap’s denim focus
Turning to Gap, List said the focus continues to be on improved profitability, primarily through better product assortment and inventory composition, as well as reduced promotional activity. The chain did see “positive sales over traffic across all channels, indicating continuing improvement in customer response to product,” and the most recent quarter was the third consecutive one with improved margin rates versus last year.
“The Gap brand has been focused on reestablishing its authority in denim and its work really came to life with our Fall launch, supported by the ‘It’s Our Denim Now’ marketing campaign at the end of August,” List said. “The response, particularly in women’s, has been strong, with global denim sales and margins both comping positively in the quarter. Despite these positives, we still have much work ahead to restore profitability to the Gap brand. The margin rate improvement has not been sufficient to offset the negative revenue trends and leverage the cost structure.”