Saturday, September 9, 2017

Good News About Gap? Wait...


It was widely reported this week that Gap, Inc. would be closing 200 Gap and Banana Republic stores, whilst increasing store counts by 270 on Old Navy, their “discount” brand, and Athleta, athletic apparel.

On the news, Gap stock (NYSE:GAP) soared 7% in one day.  This means the stock market thinks it is good news.

Really? Please help me understand:

1.     The general message is that there was a merchandising failure in Gap’s two oldest and signature branches. Per Arthur Peck, CEO, described the downturn as “significant and acute” and said the company made “creative missteps” that led to the sales decline. (http://money.cnn.com/2017/09/06/news/companies/gap-banana-republic-stores-closing/index.html?section=money_topstories)
a.     Meaning: they lost their merchandising mojo at both of their key businesses. Thus, losing the customer’s attention and dollars to competitors (like Inditex and Uniqlo?)
2.     What are they doing to right the ship at Gap and Banana Republic? IF Peck doesn’t give us an idea, we have to wait and see. For all we know, they have no clue and are just going to let the two businesses continue to decline, hoping for resurrection from the other two branches, Old Navy and Athleta. Which means more store closings in the future, or even abandonment as with Limited.
3.     IF they hope to resurrect the Gap and Banana Republic business, what is their plan? New merchandising, new positioning, new senior staff (the fish stinks from the head, goes an old Argentinian saying)? All of the above?
4.     IF Old Navy is to be the flagship of the future, that means the unit sale is lower, so they will need more and more stores or more and more customers to keep growth, or both. What indications do we have that Old Navy can do that? How are they favorably positioned in the market to meet the category killers?
5.     The market cap of the company has declined more than 50% since 2013. (https://ycharts.com/companies/GPS/market_cap) As a potential investor and before I put any money into the stock, I would like to feel comfortable based on the above that it is not going to continue to decline.

This is not to say that Gap does not have definite plans to address all of the above NOW-I don’t know (if not definite plans and just thinking about it, maybe too late by the time the plans put into practice and merchandise delivered).

If what you are doing fails (closing stores is a sign of failure), you need to change something. Why did you fail? What are you doing about it?

Conclusion: As a stock market investor with liquid capital, I would absolutely not invest in GAP at this time. If anything, the good news without the rest of the story is not good enough news to separate me from my money. I need more information.

Finally, the situation at Gap (as far as we can see) may be symbolic of a widespread problem today, which I have pointed out numerous times: Companies simply accept the problems they have as “market forces” and out of their control. I disagree. Both failure and success is totally in your control. You just need to change with the market or, preferably, be disruptive and lead. It seems to me that, in today’s challenging market, many managers and companies just cannot get out of their own way.


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