Can Gap cut its way to profitability?

Photo: Getty Images
Dec 03, 2018

Gap Inc. admitted that the long struggles at its namesake chain are no longer only due to merchandise and pricing issues but because it has way too many underperforming stores. CEO Art Peck said Gap will look to close hundreds of doors as it shifts focus from growth to profitability.

Last week, on its third-quarter conference call with analysts, Mr. Peck said the opportunities available for the Gap chain have faded since it dominated the marketplace for jeans and casual wear in the nineties. Industry pundits have largely blamed the challenges on the arrival of fast-fashion chains.

He said, “I do believe that the specialty space that Gap occupied when we had close to 1,100 stores in North America, that that space has contracted somewhat. And some of that has gone to value; some may have gone to premium.”

With closings in recent years, the Gap chain has 775 specialty stores globally. Gap’s outlet (about 500 stores) and online businesses are not underperforming.

Mr. Peck further said long delays in addressing underperformers is now hurting the potential of healthier stores. “We have stores that we have allowed to continue to age in locations that have also continued to age. And at some point those stores become toxic to the health of the business.”

The main challenge has been women’s, and that weakness impacts men’s and holds back gains in other categories.

Mr. Peck said Gap is working with landlords to minimize the impact of the closings, but warned of “financial consequences.” The closures will take place as soon as feasible. He said, “I’m going to move thoughtfully, but aggressively.”

The focus on Gap chain will shift to improved margin and expense reduction to stabilize the business.

“I do believe there is growth in this brand, but we’re not building a plan that’s predicated on growing our way out of the problem,” said Mr. Peck. “We are building a plan that’s predicated on making structural changes that bring the P&L structure more in line and deliver an improvement in profitability, and that’s what we’re committed to deliver.”

DISCUSSION QUESTIONS: Is Gap Inc. making the right move in closing potentially hundreds of Gap branded specialty doors to stabilize the business? What challenges does a “shrink to profitability” strategy present for retailers?

Please practice The RetailWire Golden Rule when submitting your comments.
"I think closing stores will help, though merchandising and marketing definitely matter a lot."
"I am guessing there are strict product rules to follow, written in stone with the belief of maintaining its core customer who has long since moved on."
"Hard to win with negative margins. When your products are basic, your locations are not experiences and you are always on sale — the future is not bright for growth."

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23 Comments on "Can Gap cut its way to profitability?"

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Paula Rosenblum

I think closing stores will help, though merchandising and marketing definitely matter a lot. Gap got crazy overbuilt. I don’t know what the right size is for them, but it’s smart to do this proactively rather than wait for bankruptcy court. People don’t want to wear big logos anymore. Well, fewer people. Whoever Gap is now, it doesn’t merit the size it is, for sure.

Art Suriano

Too often retailers make the mistake of opening and opening stores, only to find out eventually, “oops … we have too many stores.” Having too many locations is part of the problem Gap is having along with the fierce fashion apparel competition, changing times and increases in online shopping. That said, Gap is wise to close stores now and focus on profitability rather than waiting too long and finding themselves facing bankruptcy. Art Peck is taking a logical approach with the necessary steps to select which stores to close and which stores Gap can remain focused on for growth. It will be a complicated process to go through, and no doubt leave many customers and employees unhappy but once done the company will be stronger and be able to focus on growth and success. I see this as a smart move.

Neil Saunders

The thinking is all muddled. The root of all Gap’s problems is the product. It has been churning out the same old boring basics for years. There is very little, if any, innovation in styling, detailing or fabrication. That’s why it can’t charge full price. That’s why people don’t visit stores as much as they once did. And that’s why the business model is collapsing. It is rather worrying that Gap’s executives do not seem to grasp this reality.

Bob Amster

“Boring basics…” Nice alliteration! The combination of too many locations and unexciting product is like a perfect storm; lots of damage! Closing the underperforming stores solves an immediate financial problem. Keeping the rest of the stores open depends on attracting customers.

Paula Rosenblum

I don’t think I agree. I used to use Gap as an example of a chain that basically ignored its own internal radius restrictions. Malls dictate them sometimes, but Gap was in a position to open in strip centers if it had to. Its signature style is its signature style. And just like PacSun and others, the market for that style shrank. You gotta be who you are. I still remember Gap’s “floral phase.” It was terrifying.

Jeff Sward

Yes and no. Yes, in that in an over-stored environment, Gap certainly had its share of overly ambitious stores. That is not a big shocker. No, in that some portion of those stores would not have to close if Gap had by now fixed its content and merchandising problems. Their retreat into safe and predictable offerings diminished their appeal as a go-to shopping destination. They are now a 40 percent to 50 percent off destination. Without that headline, they don’t appear to have much draw. Their holiday sweater offering has been the first fun and interesting offering in a while. That was something they used to execute with regularity. And it remains a very fixable problem. I am optimistic that one of my favorite mall stores will once again become a fun and interesting place to shop — and buy.

Dick Seesel

I agree with Neil’s assessment that product is the root of Gap’s problems. (At the same time, they are overstored and would benefit from some pruning.) The Gap label hasn’t had any particular cachet since it promoted khakis more than 20 years ago, and it is caught between its own value and premium brands. (Not to mention the tectonic shift from jeans to activewear.) Meanwhile, there are so many alternatives that didn’t exist in Gap’s heyday, from fast fashion to off-pricers.

Not so easy to get the product right vs. closing stores, but this is job one.

Chris Petersen, PhD.

Right-sizing stores should be an ongoing process, not an event. If retailers are focused on the right omnichannel balance they need fewer stores, but in the right places. Shrinking to achieve profitability is a slippery slope. Sears has been on that path for a decade. The critical challenge for the Gap is “relevancy.” It’s not just the number of stores or staff. They must make the store and online experience relevant for today’s customers. At the most fundamental level, Gap needs to re-examine its brand an core product offerings — are they relevant to today’s Millennials? Cutting the number of me-to products is just as important as shedding stores.

Dave Bruno

I agree with you Chris – right-sizing stores should definitely be an ongoing process, not an occasional exercise. In addition to evaluating store strategies, however, I also believe that evaluating assortment strategy should be an ongoing process. I fear Gap has remained too attached to an assortment strategy that lost a large part of its appeal close to a decade ago. I wish them the best and hope this store plan is the first step in a well-rounded strategy to recovery.

Frank Riso

Gap is making the right move in closing a large number of stores. It is a difficult decision but should be made in order to save the brand. It will have a number of challenges in doing so, mostly dealing with lower sales figures, stock market issues and most of all a need to strengthen the brand by online sales. if done right Gap can gain back some of its sales with greater profits online, but it has to put a better plan in place and even partner with others such as Amazon.

Ray Riley

Nope. They need to rationalize the store portfolio, get better clothes to sell (closer to Intermix), and invest in their people to differentiate Gap as a retail employer with growth opportunities.

Adrian Weidmann

The brand and shopping landscape is seismically changing. Gap doesn’t have the same cachet with shoppers anymore. They should have gotten out in front of this sooner but closing stores is at least a reasonable effort to stay on the playing field. Cost cutting alone won’t save the brand. Gap needs to figure out who they are and why, how and where they align with their customers. Will they be the next Sears? Let’s hope not.

Gene Detroyer

If an “under-performing” store is losing money, get rid of it fast. But understand that you can’t cut costs as a way to profitability.

As my colleagues have noted, Gap has an underlying problem and it is their product. If you don’t fix that one, the “performing” stores will soon be under-performing.

Sid K. Hasan

I’m on the fence here.

On one hand, Gap became a massive real estate giant. On the other, Gap neglected its customers and their buying habits (DATA). On the last hand, retail neglected innovation/technology.

The way forward could possibly be a mesh of a smaller physical footprint + data deep dive + loyalty. The brick-and-mortar store of the future is not built on brick; it is built on data.

Phil Rubin

Gap hasn’t been relevant in a long time, other than to retail landlords. They are following in the footsteps of Limited (and PacSun as Paula mentions in her reply to Neil) into oblivion. There are better basic goods to buy than Gap’s that are not only more contemporary but that also deliver with a better customer experience.

Speaking of which…Gap was also way too reliant on Syncrony to fuel its growth, ignored non-tender customers for way too long and remained overly reliant on promotion.

Retail darwinism will continue until the herd is appropriately thinned.

gordon arnold

Survival and growth have the exact same requirement — profit. Sales with acceptable margin levels at the needed turn rates will yield profits. Generating the needed selling results for growth and/or survival is strategically supported by customer accessibility and willingness to participate.

Closing stores without increasing accessibility will always reduce traffic in a number of ways. Fewer stores as a result of closings not only reduces accessibility for a mechanical reason(s) but it also is a negative message to the consumer that is only looking for positives.

I see nothing in the plans here to increase traffic and therefor improve sales. Very large retailers, both brick & mortar and e-commerce, with the same capacity to understand and evolve to a 21st century platform, will mistake their endurance for success and over time fail as well.

Lee Peterson

Gap reminds me of JCPenney in that their main plan, brought forward by a financially oriented leadership group, is to cut their way back to profitability. Relevance to the new customer, innovation, convenience and WAY better product while right-sizing is the only way to build themselves back to a great brand and so far, they seem to be able to only inch their way towards those goals — other than cutting, which they’re great at.

Sad, but like Penney, you can see the slow death spiral forming for Gap.

Cynthia Holcomb

It is the product. Gap has not reinvented itself since the beginning. Internally, I am guessing there are strict product rules to follow, written in stone with the belief of maintaining its core customer who has long since moved on.

In my years of being hired to go in and reinvent a brand, with the exception of one company, the mindset of leadership is the cog that stops the wheel of reinvention. It always starts the same. Sure, lip service to the promise of a bright new future sounds great for a while. But then slowly but surely, turf wars break out. Those with the loudest voice politically complain up the chain of command and voila! It is back to the comfort zone of the past.

Shrinking stores as a path to profitability is an aid to help Gap leadership manage their role in Gap’s path to irrelevancy. A tragedy of human nature.

Jeff Miller

Closing underperforming stores should be a key part of “Retail Business 101” class for all CEOs especially any that are over-indexed in malls. It certainly will help with profitability but Gap’s root issues are far deeper.

The most glaring issue is not necessarily boring product as there are lots of retailers that do well with boring products. The main issue is that they have trained their shoppers to expect discounts and promotions on everything, every day of the year. I am pretty sure there is a standing 40% discount offer emailed every day that ties to big posters with the same offer when you walk in the door. Then, when there is a real sale like Black Friday you see discounts of like 70%.

Hard to win with negative margins. When your products are basic, your locations are not experiences and you are always on sale — the future is not bright for growth.

Peter Charness

As some have noted, managing the real estate portfolio is an ongoing exercise, with openings, closings and renovations being part of the job. While I suspect that online sales growth means a lot of retailers might need to be pruning store square footage a bit, retailers don’t save their way to prosperity and must grow top line. Some store repurposing with the capability to pick up and ship from store more efficiently should also be on the list, but growth through more attractive product has be job one.

Mark Price
Mark Price
Chief Data Officer, CaringBridge
3 years 1 month ago

Closing stores will certainly help profitability. However, if the chain does not understand what are the key drivers that led those stores to underperform, they are likely to fall into the same trap in the future. From my experience, the issue usually has to do with a smaller group of best customers and prospects that resemble best customers within the trading area of the store. They must understand what differentiates their best customers, and then be able to apply it to the prospect universe in the trading area. Only then will the company gain insight that will help the remaining stores and any stores they may wish to add in the future.

Craig Sundstrom

I think many of us wonder what Sears would look like if someone else — someone actually interested in retail — had gotten ahold of them; and I wonder if it wouldn’t look like this: a big, once successful but now struggling company that’s always cutting its way, or “one new idea” away from regaining its mojo.

(Many will disagree, arguing Sears was already in far worse shape than the GAP is … or ever will be).

Back on point: yes they’re doing the right thing by closing underperforming stores — duh! That they’ll probably still have too many is a testament to just how over-stored they were in the first place, but I’m less certain how much it will help the longer term problem that a lot of people don’t buy from them (at least not in the numbers they once did).

Mike Osorio

Another example of the toxic recipe of growth for growth’s sake to satisfy shareholders, vs. responding to real consumer need. This of course is financed with ballooning debt which (shock!) eventually can’t be serviced efficiently during downturns or significant changes in buying behaviors.

Same old story, same sad result: store closings, layoffs, and cost cutting on investments in staffing and talent development, physical plant maintenance and renovations, technology and customer experience. All leading to aging stores and worsening customer experience. Another chain to eventually die from oversaturation and inability at that scale to effectively change? Probably.

"I think closing stores will help, though merchandising and marketing definitely matter a lot."
"I am guessing there are strict product rules to follow, written in stone with the belief of maintaining its core customer who has long since moved on."
"Hard to win with negative margins. When your products are basic, your locations are not experiences and you are always on sale — the future is not bright for growth."

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