3 things Gap needs to fix to turn its struggling business around

Key Points
  • Since Gap CEO Sonia Syngal abruptly stepped down in July, the company has yet to name a permanent replacement.
  • The retailer also needs to fix its Old Navy business, which was previously a driver of growth.
  • Analysts and investors are looking for signs Gap is addressing the problems when the company reports its second-quarter results Thursday.

In this article

A pedestrian passes in front of a Gap Inc. store in Miami Beach, Florida.
Scott McIntyre | Bloomberg | Getty Images

Gap needs a new game plan — and fast.

In April, the retailer announced the departure of the head of its Old Navy business, which was hit by marketing missteps and supply chain snarls after being a driver of company growth during the pandemic.

Then in July, Gap CEO Sonia Syngal abruptly stepped down after about two years on the job as sales continued slumping and challenges mounted.

Gap has since named a new leader for Old Navy, who took over just earlier this month. But it still needs a permanent leader to guide the overarching business — which includes its namesake brand, Banana Republic and Athleta — back to expanding its revenue.

Gap is scheduled to report its fiscal second-quarter results Thursday afternoon, and the company has said it expects sales for the period to decline a high single-digit percentage from a year ago.

Steep markdowns to clear bloated inventories are expected to hurt gross margins, with Gap forecasting its adjusted operating margin in the quarter to be flat to slightly negative.

Analysts are forecasting the company to report a loss of five cents per share on sales of $3.82 billion, according to Refinitiv estimates. That would represent a 9% drop in revenue from the year-earlier period.

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

Dana Telsey, chief executive officer at Telsey Advisory Group, described the company as suffering from "choppy performances across brands, uncertainties in leadership and direction, and a lack of visibility to stabilization with a clear plan for recovery."

Here are three things that Gap needs to get its business in better shape.

1. Find a CEO

The company has been without a leader since Syngal left last month, casting uncertainty over its future.

Bob Martin, Gap's executive chairman, has been serving as interim president and CEO, with Syngal helping out for a brief transition period. But analysts and investors want to see a permanent replacement with a strong track record.

Jane Hali & Associates retail analyst Jessica Ramirez said she would like to see a CEO with a strong background in retail merchandising who will push the company to innovate — particularly at its Banana Republic division, which she said needs to find a new identity coming out of the pandemic.

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

"Gap seems to just constantly miss what the consumer is looking for," Ramirez said. "There's something that just doesn't stick."

2. Get Old Navy back on track

Old Navy, know for its budget-friendly clothing for kids and adults, has been crucial to Gap's success and accounted for more than half of the company's global net sales of $16.7 billion in fiscal 2021.

The business was on such a tear that in 2019 Gap said it was going to spin Old Navy into a separate publicly traded entity. But those plans were called off in January 2020, with the company saying its performance had softened and that the costs to complete such a separation would outweigh the benefits.

Then the Covid-19 pandemic hit, and even bigger cracks started to form.

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

Gap chalked up the losses to imbalances in sizing and assortment due to ongoing inventory delays. It also acknowledged that a push to sell more plus-size items at Old Navy resulted in the retailer having too many of the extended sizes and not enough of its core sizes.

In July, Deutsche Bank downgraded shares of Gap to "hold" from "buy" due to "low visibility" around the top-line recovery at Old Navy. Increased promotions in the apparel space are also likely to have a negative impact on Old Navy, it said.

Earlier this month, Horacio "Haio" Barbeito — most recently president and CEO of Walmart Canada — took over as head of the business.

3. Prove out Yeezy bet

It was June of 2020 when rapper Kanye West first touted that he would be collaborating with Gap on a line of clothing under the Yeezy name. More than two years later, it's unclear just how much the Yeezy gear will move the needle for Gap, if at all.

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

Items that have since debuted through a partnership with luxury fashion house Balenciaga are mostly unisex in fit and monochromatic in style: a $340 parka, a $120 three-fourth sleeve Y-shirt and $300 overalls.

Gap has recently started to hawk the products in some of its stores, including its flagship Times Square outlet in New York City. But the presentation of giant trash bags full of the Yeezy Gap merchandise in malls around the country has created confusion and been mocked online.

A representative from Gap didn't respond to CNBC's request for comment about the display.

An analyst at Wells Fargo had estimated the Yeezy line would add roughly $1 billion in incremental revenue for Gap. But West's creations need to get people to spend money, once they draw fans into stores.

"No matter what Kanye does, people will follow Kanye. He can bring people through the door," said Ramirez. "But if Gap's actual assortment isn't something that the consumer wants to stick around for, they're not going to."

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