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Old Navy’s Supply Chain Central to Goals of $10 Billion in Annual Volume and 2,000 Stores

The Gap and Old Navy brands will become corporate frenemies and competitors next year after the two split off into separately traded firms, with the latter aiming for $10 billion in annual volume over time.

At Thursday’s Gap Inc. Investor Day meeting, Old Navy global brand president and chief executive officer Sonia Syngal spoke about the brand’s path from $7.9 billion in net sales last to year to the goal of $10 billion over time as a standalone company.

So how does Old Navy plan to accomplish this?

Syngal believes Old Navy’s proven, scaled supply chain provides an advantage versus competitors, helping the retail chain offer quality, on-trend product that is innovative and fits well at value pricing. Old Navy produces 700 million units annually, and strong vendor relationships allow the company to optimize unit cost and inventory flexibility to drive profits. The top 20 vendors produce about 60 percent of the volume, she noted, and across a geographically diverse base, only Vietnam accounts for more than 15 percent of the production.

Old Navy already is digging deeper on inventory optimization at the store level. This summer customers in the middle of the country showed a preference for capri pants, while on the West Coast skinny styles sold well and in Manhattan shoppers spent on on-trend high-rise, wide-leg pants, Syngal noted.

Optimization helps localize the assortment through those aesthetic preferences at the store level, and can even take into account weather differences across the country. Even in the same metropolis, such as New York City, there are differences between the Manhattan customer and the one in the Bronx. “These are all aspects of store level allocations and localization that we want to go after in a big way,” Syngal told analysts.

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Across Old Navy’s 42 million known active customers as of 2018, the brand has “as many customers that have household annual income below $75,000 as above $75,000. Regardless of who you are, everyone wants value,” Syngal said.

Among Old Navy’s iconic “must-haves” are: a $15 cami dress, described as an Easter dressing go-to item at a critical price; $7 Jingle Jammies pajamas; $5 Old Navy American flag logo T-shirt that is a Fourth of July staple, and $1 Cozy Socks, which sold almost 10 million units last year over Black Friday weekend.

Another big seller in denim is the $25 Rockstar jean. “We sell  40,000 Rockstars a day,” Syngal said, noting the garment’s stretch recovery, high rise, different shades and washes. “We are confident we can steal share from both the premium players and the value players,” Syngal said.

In fact, denim is a key category for Old Navy and one where there’s room to expand, along with fleece, outerwear and activewear. Other categories Old Navy can win with product are through adjacencies, such as growing share with the plus-size market in-store and online, as well as add innerwear and beauty, Syngal said. The latter would help drive frequency and basket size. And the company also has room to expand and grow share in the kids and babies categories.

Syngal emphasized that Old Navy has significant runway for growth through its store base and e-commerce business, where profitability is on par with the brick-and-mortar base.

Old Navy currently operates 1,140 stores across 49 states and 10 countries, with additional franchise opportunities overseas. Old Navy also has started opening stores in areas that the CEO refers to s small markets, largely underserved communities with populations of less than 200,000.

“Customers want stores closer to where they live,” Syngal said, noting that Old Navy could double its fleet to 2,000 stores in North America through expansion in these markets. And while the company’s e-commerce has been around since 1999, Syngal described the runway for growth as high because “17 percent of customers shop across both channels. The lifetime value of a cross-shopper is three times as great as a single-channel shopper.”

These factors buttress Old Navy with an “enviable financial model with great cash and great returns,” Syngal said. The company already maintains a “highly profitable store base” focused on off-mall locations, $1.6 billion in online sales last year, and a 7 percent compounded annual growth rate between 2016 and 2018. The four-wall cash contribution margin in 2018 as a percentage fell into the mid-20s.

Syngal said Old Navy is uniquely positioned at the intersection of value and specialty apparel. With its multiple growth drivers, becoming a standalone firm enables the company to adopt a mono-brand focus and leverage capital resources for growth, she added.

“The separation allows us to have the focus we need to deliver this strategy. We know this is the right one [to get to our] path to $10 billion and beyond,” Syngal said.