Unlike Troy Smith, who just locked down the Heisman Trophy with his performance for the Ohio State Buckeyes against archrival Michigan, Gap (NYSE:GPS) is the player you pull from the game after he's thrown four straight interceptions. In football, you can't win games if you lose the turnover battle. Similarly, investors can't beat the market with companies that continually drop the ball.
Gap's dismal play isn't winning the retailer any fans. On The Motley Fool's new, free stock-rating service, Motley Fool CAPS, you'll find that investors like you have given the longtime laggard a one-star rating out of five. You know you've got problems when Gap is called Grap, as one CAPS investor did in clarifying his rating.
Those who were anticipating the Gap of old to reappear this fall unfortunately found more of the same Grap we've all grown to expect. My colleague Alyce Lomax took us through the retailer's latest lackluster quarter.
We all get the picture: Gap stinks. But what now? Is there any remaining hope for a turnaround? Maybe, but we'll need to dig a little deeper to find it. In so doing, we may find that if there's a turnaround on the horizon, it might come from the most unlikely of sources -- Gap's corporate charitable efforts through Product (Red).
In this edition of Fool on Call, we'll use Gap's latest conference call to discuss these two topics:
- The status of Gap Brand
- The brandwide effects of (Product) Red
Progress at Gap?
Gap carries three primary concepts: Gap Brand, Banana Republic, and Old Navy. In my mind, Banana Republic is its best brand, with the right mix of versatile and fashion-friendly apparel. Gauging from management remarks in the call, the leadership is pleased with Banana Republic's recent performance and current direction.
Management is less happy with Old Navy, as customer traffic continues to deteriorate. That said, the company believes it has the right leadership in place and the right plans implemented to get "trend-right product into stores faster." I'll believe it when I see it.
I'd prefer to spend the bulk of our time on Gap Brand, specifically its adult business. At the outset of the call, CEO Paul Pressler said that he was pleased with the "continued progress at Gap," but admitted that he would like to see "top line results improve faster." Not exactly a ringing endorsement, is it? Nor should it be, considering that same-store sales for Gap North America declined 7% year over year. The problem once again comes down to a lack of trend-right fashions. Gap can toss out its marketing plans and initiatives to refresh its store environment, but neither matters if customers aren't first drawn to the product.
After a recent write-up on another struggling youth retailer, Pacific Sunwear (NASDAQ:PSUN), in which I commented that PacSun's move to reduce clutter in stores was a wise one, one reader responded with a good point. Gap also maintains a fairly clean and clutter-free store environment, yet it hasn't helped it improve customer traffic. While I understand the reader's argument, there's a key difference in my mind between Gap and the likes of Abercrombie & Fitch (NYSE:ANF) or Guess? (NYSE:GES), two retailers with a similarly minimal approach to store layout. Namely, Gap is not cool, and the other two are. It's as simple as that.
According to management remarks, Gap Body, Baby Gap, and Gap Kids are all holding their own. But Gap continues to struggle in identifying the right fashions for its adult business, especially in its core customer segment of 18-to-34-year-olds.
More specifically, men's and denim categories are significantly lagging. I found little encouragement in management's remarks regarding these two categories. In men's, management is "working to add more newness across the board," and for denim, the company is in the "midst of a two-month test" to explore the right fit, fabric, and wash of its five-pocket denim. Basically, they're working on it. Find any comfort in these words? Neither do I.
Product (Red) brings hope in more ways than one
I found happier news when the discussion turned to Gap's new clothing line, called Gap (Product) Red. Product (Red) was started by Bobby Shriver and U2 frontman and activist Bono. Its goal is to team up with corporations to produce iconic brands, with a percentage of profits going to a fund used to help women and children in Africa affected by HIV and AIDS. The products involved include a red RAZR by Motorola (NYSE:MOT) and a red American Express (NYSE:AXP) card.
Being charitable and competitive are not distinctly separate goals. In fact, it can be argued that business has entered an age when the former and the latter are increasingly tied together. Gap is realizing this on two fronts.
In mid-October, the company launched Gap (Product) Red in North America, and management is already excited by how the new line is connecting with customers on a "deeply personal level." First, Gap is finding that customers are drawn to a product that is stylish, but also backed by a charitable purpose. Management remarked, "We've heard from customers and employees across the country [about] how proud they are to support this meaningful cause by purchasing Gap (Product) Red."
The second thing Gap is learning arose during the question-and-answer portion of the call: Joint charitable-competitive initiatives can lead to innovations that trickle down to the rest of the company. Here, an astute analyst noted that Gap (Product) Red appears to use higher-quality fabric than the rest of the assortment utilized in Gap stores. The analyst wanted to know whether the (Red) assortment could elevate other categories in the coming quarters.
According to management, (Product) Red not only creates a "great buzz" among consumers, but it also has led to "great learning" for the company. (Product) Red was originally intended as the "premium expression" of the brand, but shoppers' response has been so positive that management suggested we will see "many of the fabrications and attitudes of that [line of clothing] showing up in future seasons in the rest of the assortment." Finally! The company gets it.
Gap finds life in red
Gap's leadership could have simply walked into a Guess? or a REUHL store to understand that 21st-century youth-oriented fashions have adopted an edgier look and a premium feel. Alternately, you would've thought that quarter after quarter of poor results among the adults category at Gap Brand sent a clear enough signal that things needed to change, and drastically. Perhaps in (Product) Red, Gap has finally found the motivation it needs to get the rest of the brand in gear, accruing more attitude and more premium-quality materials.
I don't recommend jumping on board yet, but this new development is worth monitoring over the coming months. (Product) Red is a promising new member of the Gap lineup, but we'll want to see whether it will indeed lead to a revitalized offense and a few more touchdowns, fashion-wise, for the entire Gap Brand.
Further fashionable Foolishness:
Gap is both a Motley Fool Stock Advisor and a Motley Fool Inside Value recommendation. Pacific Sunwear is also a Stock Advisor pick. Try any of our Foolish newsletters free for 30 days.
Fool contributor Jeremy MacNealy has a player rating of 97.94 and is ranked 285th out of 13,770 participants at Motley Fool CAPS, the Fool's new stock-rating service that's open to everyone. He has no financial interest in any company mentioned. The Motley Fool has a nifty disclosure policy.
