Margaret Bogenrief January 03, 2012
Well, we’ve consumed our egg nog, nursed our hangovers, and are ready to get back to work. For some retailers, such as Kohl’s, this means reflecting on a successful holiday sales season, while for others, such as GAP Inc, it’s time to start licking their apparel wounds and figuring out what went wrong. Obviously, as distressed players, we here at ACM Partners are far more interested in examining companies in need of serious help, so let’s get to a short study of GAP’s demise.
First, a quick look at the basics:
- “Gap sales are on track to come in this year exactly where they were in 2002, at $14.5 billion. That year, Gap’s revenue represented 8.3% of what Americans spent on clothes; the figure rose to 9.6% in 2003. Last year, in contrast, sales totaled 7.6% of domestic apparel spending, which actually understates the market-share loss, as Gap’s overseas revenue has increased substantially in recent years.”
- Obviously, and more qualitatively, GAP has experienced massive downward pricing pressures on the eponymous brand, as apparel companies such as Forever 21, American Eagle, and H&M have crowded the marketplace and usurped GAP’s traditional customer base.
- And, finally, while stock prices don’t always precisely indicate a company’s general health and potential, GAP shares now trade “just above $18 after declining 16% this year, they have gone just about nowhere since the end of 2002.” Some experts predict the stock could flirt with $17 before the end of this year.
Now, in 2012, GAP is set to close approximately 20% of its domestic locations while turning to international markets to boost sales (at a time when the entire Euro zone appears on the brink of contraction). Interestingly, while the market’s been quick to jump on the brand for lack of coherent apparel design, cluttered store locations, and inconsistent leadership, GAP’s demise reflects a company that’s lost and adrift in the marketplace.
Here are a few areas in which GAP’s gone the wrong direction:
- Strategic blunders: GAP has, without putting too fine of a point on it, lost its fashionable way. When the company emerged as an industry leader for “basics” in the 1990s, GAP was a “one-stop-shop” for all things t-shirt, jeans, and khaki-related. In short, customers knew what they were getting when they walked into the stores. Starting in the early 2000s, however, GAP veered from the nuts-and-bolts of its profitable products, and started experimenting with apparel design and placement. Gone were the reasonably-priced denim and cotton items, replaced by garishly designed-and-constructed “fashionable” pieces.
- Poor cost management: GAP’s profitability took a major hit in 2011 after the company purchased cotton at nearly year-high prices for holiday goods production, in a move that’s generally reflected the company’s poor cost management. Notoriously inefficient supply chain management and inefficient hedging initiatives have cut severely into GAP’s performance.
- Over-expansion: While GAP emerged as one of the retail darlings of the 1990s, the company spent much of the 2000s engaging in a series of expansions-and-contractions that belied the company’s strategic chaos. Forgoing its roots as an affordable option to higher-end department stores and retailers, GAP found itself both competing in the lower-cost markets (Old Navy being an obvious example) and higher-end retail space (the since closed Forth and Town line of stores). Correspondingly, the brand now finds itself, through its own expansionary moves both up-and-down market, crowded out of the price-and-apparel space that was once GAP’s financial bread-and-butter. In short, GAP’s going to have to rid itself of the majority of its most recent acquisitions (what role does PiperLime play in GAP’s future?), as well as the Old Navy brand, if the brand is to reassert itself in the marketplace.
- Finally, GAP has been slow to take advantage of a strong web presence. Recently ranked one of the lowest participants on a list of online customer satisfaction, GAP was late to the web-game, and has since failed to maximize value on brand loyalty and online availability. Now, the company is forced to close several brick-and-mortar locations at the same time it’s frantically attempting to leverage its web presence.
Interestingly, the GAP has fallen into many of the same management and operational traps as smaller retail and apparel companies; and, much like many of the distressed/struggling firms we encounter in the marketplace, appears in need of an active turnaround plan. Look to stockholder dissatisfaction and an opportunistic activist fund to effect a significant change in the medium term.
Margaret Bogenrief is a partner with ACM Partners, a boutique crisis management and distressed investing firm serving companies and municipalities in financial distress. She can be reached at firstname.lastname@example.org.