The Gap's Three-Pronged Attack Brings Big Numbers In Quarter Two

By Sam Lewis

Fashion retailer’s profits rise 25 percent

The Gap released its results for the quarter ending August 23, and seems to have made its way back to relevancy. The retailer, once left for dead, continues to thrive in a climate that has been less than favorable for almost all apparel retailers.

The report, released on August 22, showed a climb in net income for The Gap, up to $303 million, or 64 cents per share, versus $243 million, or 49 cents per share from a year ago. These results were on par with the forecasts compiled by analysts of Bloomberg. Gap stores open for at least a year saw profits rise 5 percent during the quarter, including 6 percent gains at Old Navy and The Gap, along with a 1 percent decline at Banana Republic. Many retailers’ second quarter results showed a decline in sales and lowered end-of-the-year forecasts. Gap bucked that trend, announcing that beginning in the third quarter, its annual dividend would be raised 20 cents per share.

So how is Gap performing so well in such an unstable environment? First, CEO Glenn Murphy rethought the company’s business model. Murphy cut poor-performing locations, closing 250 Gap stores and 50 Old Navy locations since 2008. He also opened 50 new Banana Republic stores. The store count is down, providing less overhead, and the approach is more balanced, providing equal leverage for all three of Gap’s brands. “Given how fragmented the apparel business is, coming to the market with different brands and unique brands and multiple brands into different channels and into different geographies is paying off, as evidenced by this quarter,” Gap CEO, Glenn Murphy, said.

Next, the Gap reinvented its look. Murphy recognized that the company’s designs seemed dull and uninspired. His thought was to get back to basics with an edge. Murphy brought in new designers to restore the classic Gap identity. He focused the Banana Republic brand on versatile work wear for both genders, and started a workout apparel brand, Athleta, bringing high quality, low-priced women’s workout clothing to the Gap. Murphy also partnered Old Navy with Disney to boost sales in children’s apparel. These moves garnered shoppers’ attention in 2011, when Gap’s turnaround began, and the changes continue to be successful.

Finally, the Gap is focused on engaging with customers not only in stores, but in new ways online. It saw online sales grow 27% in the first quarter of 2013 and has actively pursued new channels to grow further. Included in these are styld-by.com, a blog that allows Gap customers to show off their Gap clothing items, in hopes of inspiring others to pursue their ideas of Gap fashion, and a new, aggressive ad campaign launching August 29 on Tumblr.

All of these factors have allowed the company to return as a retailer to be reckoned with. Despite its competitors’ declining sales numbers, The Gap has found ways to revive itself, remain relevant, and thrive in the tumultuous come-and-go environment of specialty retail.