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Gap’s CEO Pegs Growth Strategy on Active, Value

In many ways, the advantages that other brands are trying to create for themselves are already inherent in the Gap Inc. model.

That was the underlying message from Art Peck, president and CEO of Gap Inc., in his address at Goldman Sachs 24th Annual Global Retail Conference Wednesday.

While companies like Coach and Hudson’s Bay Company continue to explore M&A options to drive profitability and growth, Gap is already enjoying the benefits of operating multiple banners and related businesses. “This is an industry that hasn’t historically rewarded scale and leverage,” he said. “As we’ve watched the industry, it is in the process of consolidating. Part of the consolidation push is that scale and leverage matters. And we are part way through fully leveraging that but we have a long way to go and a lot of opportunity in front of us.”

With Old Navy, Gap and Banana Republic, the retailer is focused on driving loyalty across brands and channels—a structure that Peck referred to as true omnichannel. He said customers who regularly hop between brands and channels are worth 10 times more than those who are only casually engaged. Further, if the company were able to convert even 1 percent of the casual shoppers to loyalists, it would result in $200 million in topline sales a year. That’s simply an advantage smaller players don’t have, he said. “We can more deeply and aggressively monetize a customer relationship than even a single brand, multichannel customer,” Peck stated.

The company is also focused on the key categories consumers turn to its brands for most.

“We’ve made significant and impactful progress on our product capabilities,” Peck said. “This is largely focused on loyalty categories. You don’t win in this business in every category. You win with loyalty in key categories and you build your basket on top of that.”

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[Read about Gap’s current financial standing: Financial Roundup: Gap Inc. Earnings Spike, Ross Stores’ Sales Above Plan]

As is the case across retail today, activewear is among the hottest sectors for Gap Inc. The company anticipates Athleta will hit $1 billion in net sales in the next couple of years. It’s also expanding this category in Gap and Old Navy stores, and even in Banana Republic, where the retailer has introduced performance chinos to give guys the same comfort they’d find in their workout wear.

Currently, Peck said, Old Navy is the “horse pulling the cart,” offering value, a curated selection and a fast turn. It’s expected that that business will pass the $10 billion threshold in the next few years. To ensure that momentum doesn’t flag, Gap Inc. is working with vendors in new ways to leverage their expertise, which has resulted in better quality and product costs. Today, 50 percent of Old Navy goods have a six to 15-week product development cycle. The balance is at 22 weeks, which is still significantly faster than the 36 to 42 week calendars wholesale brands are often working with, according to Peck. This advantage allows the company to pivot into goods as tastes change.

The Old Navy brand along with the company’s outlet and factory stores are five times more profitable than its specialty doors, so naturally there are plans to expand the former and trim the latter. But Peck said some assumptions circulating about why value is winning are false.

“Value doesn’t have tailwinds because customers are getting cheaper,” Peck said. “From our perspective, it has tailwinds because what you can buy for your dollar today is getting better in terms of trend, fashion, fabrications, silhouettes and quality.”

Gap Inc. plans to add 270 locations for Athleta, Old Navy and its value stores while closing about 200 Gap and Banana Republic stores in the next three years.

The company is also committed to building out its online fulfillment capabilities. It’s currently operating from two dedicated fulfillment centers. Going forward, it will leverage online fulfillment out of its retail distribution centers, which will allow the retailer to pool inventory without building new locations.