The Gap (GPS 5.59%) has been on the decline for many years now. It's still one of the largest apparel companies in the U.S., but it has struggled to generate growth for any of its well-known brands, and the stock reflects these difficulties.
Its CEO position has looked like a revolving door over the past several years as the company keeps pinning its turnaround hopes on new candidates, with little to show for their efforts. But the newest CEO, whom the board spent a long time seeking and selecting, was recently announced -- and he just might have a better chance than his predecessors. Here's why.
Finally getting to the core of the problem
Gap is still the largest specialty apparel retailer in the U.S., but it's up against stiff competition. It's losing market share to fast-fashion mega-chains like H&M and Zara, large retailers like Target, and e-commerce upstarts like Revolve Group and Shein.
Gap is no slouch in e-commerce, and it invested in its digital presence early on. However, there are other features its competitors have that it's having a hard time keeping up with these days. Some of them offer incredibly cheap prices for fashionable merchandise, and others offer a continually changing mix of new, trendy products.
Gap's sweet spot has always been quality basics with a modern angle, and its various brands have some play on that model. Gap is still a billion-dollar company, but this model isn't resonating with newer customers the way it used to in the past. Gap sales have been up and down over the years, but today's trailing 12-month sales are slightly lower than they were 20 years ago, which is cringe-worthy itself. But even worse, profits have nosedived.
GPS Revenue (TTM) data by YCharts
But what's the solution?
There's no easy fix here, as illustrated by two decades of declines. Management has not been able to create distinct brand identities that appeal to the modern shopper, and the situation looks urgent. The 2023 fiscal second quarter (ended Jul. 29) was dismal. Even the activewear brand Athleta, which was demonstrating strong growth for a while, is now on the decline, with a 1% decrease from last year. Management says "sales continue to be impacted by product acceptance challenges."
The stalwart Old Navy brand, which was also growing, has started to fade with sales decreasing 6%. The Banana Republic brand went through a recent rebrand, and sales perked up for some time, but they were down 11% in Q2. Finally, sales for the Gap brand declined 14% from last year. It's clear that the time has come for some serious action.
Management announced the appointment of Richard Dickson as the new CEO just a month ago, and there's reason to believe his term might be different than those of previous players. He comes from Mattel, where as COO he was responsible for revitalizing its old but iconic brands -- Barbie, Hot Wheels, and Fisher-Price -- which it calls its "power brands."
Mattel was making strong progress prior to the onset of high inflation, and Dickson is credited as being the architect behind the brand's renewal. He has the experience. Let's see why he might be able to transfer that to Gap and revitalize its brands as well.
Three quotes that inspire confidence
Dickson said in his first quarterly earnings conference call as CEO last week:
In my previous role in toys and entertainment, we always strived to make consumers fans and to grow those fandoms, and I want to apply that approach to our portfolio of brands[,] a virtuous cycle where our products and experiences motivate belief and loyalty that fans then badge and amplify in culture.
What I found unique about Dickson's approach is that he actually has one. In previous CEOs' messages, I found a devotion to platitudes about strengthening brand identities that I can't say was absent from Dickson's speech, but his went beyond the typical commitment to addressing the problem with an actual playbook.
He laid out six specific goals toward that end:
Reigniting a creative culture at Gap, Inc. that is a magnet for the industry's best talent; recommitting each of our brands to a distinctive brand purpose that aligns with customer values and sets them apart; reorienting our brands around both the art and science of design-centric thinking; reengaging in the cultural conversation with hyper-relevant products and ideas that inspire constructive dialogues; rethinking how our brands show up in store and online; most of all, mattering to our people, our investors, our communities, and the world.
Although he didn't give specifics yet, it's clear that there's already a great amount of thought being put into how to practically turn the company around, which is refreshing.
Finally, Dickson followed this up with acknowledging that "restructuring is challenging and that change of this magnitude doesn't come fast. Transformation is difficult." Again, this puts the challenge into perspective and demonstrates that he's taking it seriously, which inspires confidence in his leadership.
Should you buy Gap stock?
Buying Gap stock right now is a risky play. The market reacted positively to the announcement of Dickson's appointment, but the stock sank after the awful Q2 report. Real turnaround stories are rare -- but they do happen. I don't recommend buying Gap stock right now, but under the new CEO's care, it's worth watching.
