The Gap (GPS -0.45%) stunned investors on July 11 by announcing the abrupt and immediate departure of its CEO Sonia Syngal. Syngal also vacated her board seat, and no reasons were provided for her departure.
Syngal's unexpected resignation after leading Gap for just over two years raises troubling questions for the apparel retailer's future. Let's look back at Syngal's turnaround plans for Gap, whether she successfully executed them, and where the company might be headed after this headline-grabbing development.
Taking over a troubled company
Syngal's predecessor, Art Peck, was fired in late 2019 after struggling for four years to turn around The Gap's sluggish business. Between fiscal 2015 and 2019, its revenue rose at a compound annual growth rate (CAGR) of less than 1% as its adjusted earnings declined at a CAGR of 5%.
Under Peck, Gap's namesake brand and Banana Republic struggled to keep pace with "fast fashion" and "normcore" competitors like H&M and Inditex's Zara. Old Navy, which once outperformed its two other banners, also lost momentum.
Gap's smaller Athleta banner, which competes against Lululemon in the athleisure market, fared better -- but it was still too tiny to offset the declines of its larger brands. Gap tried to lure shoppers back and clear out its excess inventories with markdowns, but that desperate strategy merely reduced its operating margins from 9.6% in fiscal 2015 to 3.5% (or 6.4% on an adjusted basis) in fiscal 2019.
Syngal, CEO of Old Navy, took over as Gap's permanent CEO in March 2020. She took the reins just as the pandemic hit, and Gap's revenue tumbled 16% to $13.8 billion in fiscal 2020 (ended in January 2021). Its sales dipped 6% at Old Navy, fell 27% at Gap, and plunged 42% at Banana Republic. It posted a net loss for the full year.
Syngal's "Power Plan 2023" strategy
In October 2020, Syngal unveiled a new "Power Plan 2023" strategy to reboot Gap's business. At the time, Syngal claimed Gap could grow its sales by the low- to mid-single digits annually and achieve an operating margin of at least 10% by 2023.
To reach that goal, Syngal planned to close 350 Gap and Banana Republic stores by the end of 2023 and to open 30-40 Old Navy stores and 20-30 Athleta stores annually in less densely populated markets.
Syngal also believed that Athleta and Old Navy could account for 70% of its annual revenue by fiscal 2023, compared to about 63% in fiscal 2020. Specifically, Syngal wanted Old Navy and Athleta to generate $10 billion and $2 billion in annual revenue, respectively, by fiscal 2023.
She estimated that the entire company could generate about 80% of its revenue from online and off-mall locations by the end of fiscal 2023 and reduce costs by approximately $100 million by shuttering more brick-and-mortar stores and shifting some of those sales online.
Did Syngal achieve those goals?
Gap's revenue rose 21% to $16.7 billion in fiscal 2021. Excluding its temporary downturn during the pandemic, its revenue grew 2% from fiscal 2019. Its total comparable-store sales rose 6% for the full year, but its adjusted operating margin declined 90 basis points to 5.5%.
For fiscal 2022, analysts expect Gap's revenue to decline 5% to $15.8 billion as its adjusted operating margin slips to 1.8%. That deceleration can be attributed to inflationary headwinds, inventory delays, sluggish sales of Gap products in China, and size and assortment problems.
For fiscal 2023, analysts expect revenue to rise 3% to $16.3 billion as its adjusted operating margin rebounds to 3.6%. That forecast implies Gap will eventually sort out its current problems, but it will also likely completely miss Syngal's target for an adjusted operating margin of at least 10%.
Between the first quarters of fiscal 2020 and fiscal 2022, Gap reduced its total store count from 3,911 to 3,414. As promised, most of those closures were Gap and Banana Republic stores. It also increased its number of Old Navy stores from 1,208 to 1,258 and its number of Athleta stores from 191 to 231.
But in fiscal 2021, Old Navy and Athleta only generated $9.08 billion and $1.45 billion in revenue, respectively, and together accounted for 63% of Gap's top line. To reach Syngal's "Power Plan 2023" targets, Old Navy and Athleta would need to grow their revenue at CAGRs of 5% and 17%, respectively, through fiscal 2023. Those targets could be tough to achieve as the company grapples with macroeconomic headwinds, product selection issues, and supply chain challenges throughout the rest of fiscal 2022.
Lastly, Gap generated just 39% of its total revenue online in the first quarter of 2022 -- representing a slight decline from 40% a year earlier.
Gap now faces an uncertain future
I believe Syngal stepped down because it became clear that Gap couldn't achieve its "Power Plan 2023" goals. Executive chairman Bob Martin will step in as Gap's interim CEO until a permanent successor is found, but this struggling apparel retailer will continue to sink if it doesn't find better direction soon.