Call it following the money, doing what works, or just smart business, but Gap (GPS 2.70%) is planning on closing over 200 underperforming Gap and Banana Republic stores while opening some 270 Old Navy and Athleta locations.
That's going to bring the Gap and Old Navy businesses pretty close to parity in terms of store count, but with the former faltering and the latter carrying the business, maybe it's time the company made Old Navy the marquee brand.
Image source: Old Navy.
A chasm, not a gap
Sales at Gap stores have been on a long, slow decline. In its second-quarter earnings report, brand revenue fell 4% in the U.S. and 6% globally, while Banana Republic's dropped 6% and 9%, respectively.
Old Navy, on the other hand, generates more than twice the sales of Gap in the U.S. with only 25% more stores. Brand revenue jumped 6% domestically and 3% in international markets (management doesn't break out Athleta sales, but it has a significantly smaller store base).
Data source: Gap quarterly SEC filings. Chart by author.
Moreover, where Gap and Banana Republic saw comparable-store sales fall for the period, Old Navy's comps were up 5%. Neither Gap nor Banana Republic have reported a single quarter of comparable-sales gains in years. It's understandable that Gap wants to focus greater attention on the discount brand.
A fast-changing retail market
When fast-fashion retailers like H&M and Zara were all the rage, retailers quickly rushed to copy the inventory-on-demand business model. Abercrombie & Fitch transitioned its Hollister brand to tap the trend, and department store chains like J.C. Penney and Sears Holdings touted what they called fast-fashion lines, though you hear nothing about them today.
Gap also dipped its toe in the water and transformed Old Navy into a fast-fashion house with great success. But when it applied the strategy to the other brands, the company found it was no panacea for what ails retail. Gap ended up largely abandoning those designs at Banana Republic, only keeping some of the trendier fashions in select stores and online.
Image source: Gap.
Gap is hoping to save about $500 million in expenses over the next three years through its reorganization and transformation, but the overall outcome will be a business more heavily dependent on Old Navy (and to a lesser extent, Athleta).
The online channel is also going to receive more attention, because like Old Navy, it continues to post strong growth numbers, expanding at a double-digit rate last quarter. CEO Art Peck summarized what the retailer was hoping to achieve: "With much of this foundation in place, we're now shifting our focus to growth. We will leverage our iconic brands and significant scale to deliver growth by shifting to where our customers are shopping -- online, value and active."
Closing the gap
Admittedly, Gap's results are slowly improving. The 1% drop in comps it experienced in the second quarter was up from a 4% decline in the prior quarter and 3% drop last year.
But as the company heavily concentrates its growth efforts on the Old Navy concept, it may be time to throw in the towel on Gap, and as part of the ongoing transition, rechristen itself as Old Navy. After all, going after what works is smart business.
