After a brief pause in trading Thursday, GAP Inc’s February 2013’s numbers are in and, well, they’re deceptively, if not inspiringly, good.To wit: management has reported that “comparable store sales for the month of February increased 3% compared to last year’s 4% rise. Net sales for the month increased by 11%, (to) $966 million, up from $874 million for the four-week period ended February 25, 2012.” In turn, same-store-sales from GAP North America jumped more than 2%, while same-geography Banana Republic dropped 5%.
The seemingly big winner in all this? Old Navy: the brand’s comparable store sales jumped 6%, continuing a trend that’s emerged in recent years: GAP Inc. holds ground, BR loses it, and ON continues thriving in a slowed global economy.
What’s this all mean? For starters, the market’s obviously excited with both these results and those of the past year, going so far as to say that GAP’s the turnaround story of the past 12 months, if not few years.
Finally, the San Francisco based brand has its eyes set off-shore expansion, perhaps more so now than ever: company execs recently announced, in a direct shot fired across the bow at Euro-based competitor H&M, “plans to open as many as 20 more Old Navy stores in Japan in 2013.”
And really, it all makes sense. Markets respond to earnings, and GAP has, at least superficially, delivered: and the driver behind these earnings? Old Navy. Consequently, it makes sense that GAP now turns to ON to further boost growth and earnings in a seemingly-paused global economy currently rejecting BR’s high price tags, while splurging on GAP’s item-of-the-moment (most recently: brightly-coloured capris).
So where’s that leave the retailer in the next 5-10 years?
Despite recent media-proclamations that all’s good for golden-retailer GAP, the company’s headed for trouble. Yet again.
Here’s why: despite its 2012 expansion-slowed earnings, Swedish-behemoth H&M has, in recent years, outpaced GAP by multiples, with Uniqlo quickly closing in behind.
Instead of retrenching, innovating, and economizing operations and designs in order to cut COGS, boost net income, and solidify product offerings in the now internationally-dominated world of fast-fashion retail, GAP has instead decided to take the afore-listed retailers on “head-on,” by embracing the difficult-to-master art of quick operations and “modern” designs, all intended to boost inventory turns and keep consumers returning again and again. And, despite the recent few years’ positive proof the strategy’s working, it’s driving the company into a sartorial corner.
Think about it: while the market may not see this, GAP finds itself relying more and more on ON (that brand which, in terms of price and turns, rivals Forever 21, yet another retailer driving down GAP’s revenues and margins in recent years) for both international growth and revenue stability.
This reliance on the most “fast-fashion” of the three key brands coincides with the drop off in BR’s revenue and the relative stability of the GAP’s. This suggests that, given AP’s recent significant increase in prices (which rival BR’s on the high-end), consumers are migrating downward, ergo redefining the BR-GAP-ON triumvirate on the low – as opposed to high – end. In short, GAP’s using its cheapest, lowest-margin brand to artificially boost revenue and earnings.
Is this the end of the GAP as we know it? No, of course not. But it does signify a shift in its clientele and market expectations, ones that in turn clash significantly with the brand’s recent (extremely misguided) attempts to move up-market. In short, look for GAP to first rely upon for revenue – then later spin-off/sell – its most “non-GAP-aspirational” brand, Old Navy. All because management didn’t think ahead. Or at all strategically.
Margaret Bogenrief is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services. She can be reached at 312-505-0700 or at [email protected].
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