3 things Gap needs to overcome to turn around a struggling business

A pedestrian passes in front of a Gap Inc. store. in Miami Beach, Florida.

Scott McIntyre | Bloomberg | beautiful pictures

Distance need a new game plan – and fast.

In April, the retailer announces the departure of the head of its former Navy businesswhich was affected by marketing mistakes and supply chain mistakes after becoming the driving force behind the company’s growth during the pandemic.

Then in July, Gap CEO Sonia Syngal suddenly step down after about two years of work as sales continued to decline and the challenge increased.

Gap has since appointed a new leader for Old Navy, who took over earlier this month. But it still needs a permanent leader to guide the overall business – including the eponymous brand, Banana Republic and Athleta – back to revenue expansion.

Gap is expected to report second-quarter financial results on Thursday afternoon, and the company said it expects sales for the period to fall by a high single-digit rate from a year ago.

Sharp price cuts to free up inventory are expected to hit gross margins, with Gap forecasting adjusted operating margins for this quarter to stay flat to a slight negative level.

According to Refinitiv estimates, analysts forecast the company will post a loss of 5 cents per share on sales of $3.82 billion. That would represent a 9% drop in revenue year-over-year.

Gap shares are down more than 40% so far this year as of Tuesday’s market close.

Dana Telsey, chief executive officer of Telsey Advisory Group, describes the company as suffering from “an unstable performance across brands, uncertainty in leadership and direction, and an inability to stabilize with a clear recovery plan.”

Here are three things Gap needs to make its business run better.

1. Find a CEO

The company has been without a leader since Syngal left last month, creating uncertainty about the company’s future.

Bob Martin, Gap’s executive chairman, served as interim president and chief executive officer, with Syngal helping with a brief transition. But analysts and investors want to see a lasting alternative with a strong track record.

Jane Hali & Associates retail analyst Jessica Ramirez said she’d like to meet an executive with a solid background in the retail business who will drive the company’s innovation – particularly at the Banana division. Republic, where she said she needed to find a new identity. epidemic.

Banana Republic, once a workwear destination, is trying to adapt as more and more people work from home or opt for a more laid-back style.

“Gap seems to constantly miss out on what consumers are looking for,” Ramirez said. “There’s something that doesn’t stick.”

2. Get Old Navy back on track

Old Navy, known for its budget-friendly clothing for kids and adults, has played a key role in Gap’s success and accounts for more than half of the company’s global net sales of $16.7 billion. la in fiscal year 2021.

The business was in such bad shape in 2019 Gap says it will make Old Navy a separate publicly traded entity. But those plans were referred to in January 2020, with the company stating that its operations had declined and that the costs of completing such a split would outweigh the benefits.

Then the Covid-19 pandemic struck, and even larger cracks began to form.

Old Navy’s net sales for the three-month period ended April 30 fell 19% year over year to $1.8 billion. Same-store sales, which track sales online and in stores open for at least 12 months, fell 22%.

Gap creates losses due to imbalance in size and type due to continuous inventory delays. It also admits that promote sales of larger size items at Old Navy resulted in the retailer having too many extension sizes and not enough of its core size.

In July, Deutsche Bank downgraded Gap stock to “hold” from “buy” due to “low visibility” around the top rally at Old Navy. Increased promotions in the apparel sector could also have a negative impact on Old Navy, it said.

Earlier this month, Horacio “Haio” Barbeito – the most recent president and chief executive officer of Walmart Canada – takes over the position of head of the business.

3. Proof of Yeezy bet

It was June 2020 when rapper Kanye West first touted he will collaborate with Gap on a line of clothes under the name Yeezy. More than two years later, it’s still unclear how much the Yeezy gear will move the needle for the Gap, if at all.

The The first item from the highly anticipated Yeezy Gap linea nylon jacket costing $200, didn’t go on sale online until June 2021. But then in November. Syngal tells analysts on an earnings call that one of the Yeezy hoodies had the highest single-day online sales in Gap’s history.

Items since launching through a partnership with luxury fashion house Balenciaga have been mostly unisex fit and monochrome in style: a $340 parka, triple Y-shirt $120 quarter and $300 overalls.

Gap recently started selling products in some of its stores, including its flagship Times Square store in New York City. But the appearance of giant garbage bags filled with Yeezy Gap goods in malls across the country has created confusion and ridicule online.

A representative from Gap did not respond to CNBC’s request for comment on the display.

OneWells Fargo analysts have estimated the Yeezy line will add about $1 billion in incremental revenue for Gap.. But West’s creations need to get people to spend money, once they attract fans to stores.

“No matter what Kanye does, people will follow Kanye. He can get people through the door,” Ramirez said. “But if Gap’s actual classification isn’t something consumers want to stick with, they won’t.”

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