Gap Inc.’s Power Plan 2023, detailed Thursday at a virtual investor day presentation, will streamline the company as it moves from a fixed to a variable expense structure so it can focus on customer-facing opportunities for growth.
Sonia Syngal, who became Gap Inc. CEO in March, just before the coronavirus shutdown began, laid out the initiative with her team.
“We emerged with clarity and conviction with what our path forward looks like,” Syngal said. “Our North Star is that we grow purpose-led billion-dollar brands that shape people’s way of life.”
The apparel giant plans to abandon mall-based real estate, Syngal said, and that Gap Inc. customers are reallocating their spending from travel and entertainment to casual apparel and home.
“The retail disruption combined with our unique direct-to-consumer vertical omni model at scale and with speed allows us to aggressively take market share. We believe this is a once in a lifetime opportunity,” Syngal said.
Syngal also touched upon the company’s investments in technology and digital, which give it access to the data and decision-making that are crucial in a competitive environment.
“We know how she’s shopping, the way she’s dressing, what matters most to her and her family and how she expresses herself through her style,” the CEO said.
Gap’s corporate portfolio has a reach of about 80 percent of the U.S. apparel market, with 170 million known customers. It’s $16 billion in annual volume in 2019 makes the multibranded firm the “largest apparel retail company in America,” she said. “Gap Inc. is number two in the U.S. apparel market for e-commerce sales.”
The company has had strong and consistent operating cash flow, with a five-year average of about $1.5 billion, Katrina O’Connell, chief financial officer, said. “Our path forward is consistent sales growth, operating margin expansion, a more resilient and flexible business and an improved capital allocation.”
The problem in the past has been inconsistent execution, she noted. The company is looking to reallocate some of its fixed expenses and rent into demand-generation online. The reallocation includes reduction of headcount and the lowering of store expenses. The company is also taking a hard look at the future of work, and what that might mean post Covid-19. Savings would be redeployed to invest in marketing, loyalty, technology and fulfillment, the CFO explained.
Overall, the company plans for its North American store fleet to shrink by 30 percent, reflecting a smaller store base for its Gap and Banana Republic brands, which the company noted when it reported second-quarter results in August. From 2019 through 2023, a total of 350 Gap and Banana Republic stores will have been closed.
At Thursday’s presentation, the CFO said 60 percent of those stores, or 200 total doors, will close this year, with another 75 stores in 2021, bringing the total number to 75 percent of its target range. The balance of the store closures for both brands will be completed by the end of fiscal year 2023. At that point, 80 percent of the revenue of Gap and Banana Republic in 2023 will be from online and off-mall locations. Some of the leases will expire next year, and the company will spend about $210 million in one-time cash exit costs to buyout some lease locations. The company also expects to get a benefit of $45 million annually once it completes rent renegotiations with landlords.
O’Connell also addressed the company’s plans for a partial shift in its European business from company-owned to a franchise operation by 2021. The “asset-light” partnership model would reduce the company’s capital needs and exposure to volatility in the marketplace, she said.
“We believe the company can generate operating cash flow at roughly 10 percent of sale,” she said, adding that the store closures in North America alone would generate a $100 million EBITDA (earnings before interest, taxes, depreciation and amortization) benefit. The company also expects sales growth in the low-to-mid-single digits on an annual basis.
On the operations side, chief operating officer Shawn Curran told investors that the company sources in 30 countries, working with 330 mills and 620 factories. The company has been optimizing its inventory and margins through a combination of flexibility and speed, and continues with digitalization improvements to reduce costs and increase speed with its vendor base. Curran said the company’s scaled automation gives it a “competitive advantages with the e-commerce shift,” leveraging its store network for local delivery and pickup.
He did note that the company also postponed commitments for holiday orders until it got a read on what customers wanted, and once the team got that read, “we moved very quickly,” leveraging our factory and logistics partners to meet demand. The late decision has the advantage of decreasing the chance of putting into production a merchandise miss, but the downside is that the company had to pivot to air shipping the goods to get them delivered on time.
Old Navy is the second largest apparel brand in the U.S., with 45 million active customers and a highly profitable store base where 75 percent are located in strip outlet and lifestyle locations, Nancy Green, president and CEO, said. She noted that the $8 billion brand is on a path to grow to $10 billion by 2021. The four strategies are to win with product, acquire and engage the customer through its loyalty program, double the e-commerce business and via new store growth.
The two largest growth opportunities are active and kids and baby. Denim is another big category for Old Navy, with the brand now including flattering fits in inclusive size categories. The plus-size business, currently limited to online, will be rolled into its store fleet in 2021. Over the longer-term horizon, the brand plans to build on its sleepwear line by adding lounge and intimates and self care.
As for its store base, Green said the brand is looking to grow its network in small markets with populations under 200,000. The current plan is to open between 20 and 30 doors annually in these smaller markets.
Gap president and CEO Mark Breitbard said the brand began the year with headcount reductions and a real estate restructuring. “We are changing the game at Gap and fast,” he said. A reduction in management layers by 25 percent allowed for more speed in the decision-making process, and the brand is shifting to digital as it restructures its fleet.
With 4.6 billion in net sales in fiscal 2019 and 23 million known active customers, the Gap head said the brand will have narrower assortments to better provide a clear point of view each season. It will close 175 North American stores by the end of 2021, which will see it exit mall locations as it moves to focus on an off-mall store fleet. Another component of the transformation will be a greater focus on partnering with third parties for its company-owned retail doors in Europe. It’s also looking at other opportunities as it builds an “asset-light” business model that will include more licensing, partnerships and an expansion of a wholesale model that will see over 50 stores at U.S. military locations, slated to open in the second half of 2021.
“We are radically restructuring to win,” Breitbard told investors.
Gap’s Banana Republic brand is looking at how it can redefine workwear, now that many customers are working from home during Covid-19.
The brand is “famous for affordable luxury,” noted Ann Doyle, general manager for Banaa Republic, adding that it’s a “good business that has reinvented itself multiple times.”
“We are redefining our assortment to meet their needs. When they go back [to the office], we will adjust,” she said, noting that the focus now is on knits, sweaters, loungewear, sleepwear and active lifestyle products.
“We are thinking digital first and getting our products online as quickly as possible,” the GM said.
Athleta president and CEO Mary Beth Laughton believes the $1 billion brand can double to $2 billion by 2023. “Today we have a 53 percent brand awareness among U.S. active women. There’s more runway to introduce more women to our brand,” she said, adding that its omni shoppers spend 3.5 times more than its single-channel shopper. With nearly 200 locations, Laughton said the fleet is highly profitable.
Currently 70 percent of its products are made from sustainable materials, and it offers a comprehensive product offering for all sizes and ages. It’s hero assortment helps with keeping its customer base loyal and those key styles drive 70 percent of overall volume.
The brand plans to add 100 stores, with a targeted goal of 300 in the U.S. It will open 20 to 30 stores each year, and is also looking to grow internationally. For next year, the brand is looking to strategically grow its wholesale base, and form new partnerships to increase brand awareness and customer acquisition.