The Rise And Fall of Gap - YouTube

The massive clothing retailer Gap Inc.,

parent company of several brands including

its original Gap stores, is breaking up.

Some big news out of the company with plans

to separate into two separate companies,

spinning off a yet to be named company,

NewCo, which will consist of The Gap brand,

Athleta, Banana Republic, Intermix, and Hill

City.

Then the remaining company will be Old Navy.

Gap's net sales slowed at the turn of the

21st century, well before the financial

crash of 2007 devastated the retail

industry. Over a decade later, Gap Inc.

continues to struggle.

This is largely due to the Banana Republic

brand and the original Gap stores, which

haven't recaptured the explosive success

they cultivated in the 1990s.

For the last few years, Old Navy and the

athleisure brand Athleta have carried the

company.

Both have shown consistent year-over-year

sales growth post-recession.

Gap stocks surged by over 20 percent the day

the news broke as investors and analysts

applauded the move.

Frankly, it's about time.

Old Navy is a nice business, 3 percent same

store sales growth, in spite of an anemic

fourth quarter.

Now it'll finally be able to free grow on

its own, with its laser like focus I think

it can beat the 3 percent.

But others are skeptical, calling it simply a

move to boost the value of Old Navy.

My initial instinct was that this was a move

for valuation, meaning that Old Navy's

valuation was probably a little depressed

being inside of Gap Inc.

They've had to do something to get the stock

higher. This feels like that something to

get the stock higher.

But this is about the stock.

This is not about the company.

Whatever the future holds for Gap, this is a

stunning move for a company that grew from a

single store in San Francisco to become the

defining apparel retailer of the 1980s and

90s.

The first Gap store opened as The Gap in San

Francisco in 1969.

The store's name was a reference to the

generation Gap between the young, liberal

baby boomers and their conservative, postwar

parents. Hoping to entice the huge baby

boomer generation, The Gap's founders Donald

and Doris Fisher decided to sell nothing but

records, tapes, and wildly popular Levi's

jeans. Jeans, especially Levi's, boomed in

the 1960s and 70s due to what fashion

historians call the casualization of the

American wardrobe after World War Two.

People didn't look sloppy, but they certainly

adopted more casual bottom elements into

their wardrobe.

It was this very clean, simple approach to

getting dressed.

The Gap was an immediate success.

By 1972 it had twenty five stores, including

one across the country in New Jersey.

In 1973, it began offering other brands

besides Levi's, as well as its own Gap

label. By 1975, it had 186 stores in 21

states and sales of 100 million dollars.

It went public the next year.

Donald Fisher appointed Mickey Drexler as

Chief Operating Officer and President in

1983. Under his leadership, The Gap saw

explosive growth throughout the next two

decades.

Under the leadership of Mickey Drexler

through the 80s and 90s, Gap used to be the

premium growth retailer in America.

At the time it was smart, even hip

as my parents would have said.

The Gap expanded its own brands, founding

Gap Kids, Baby Gap, and Gap Outlet stores.

It even dropped Levi's, the only product it

sold in the original Gap stores, in 1991.

It also expanded beyond The Gap label by

acquiring Banana Republic in 1983 and

launching its discount brand Old Navy in

1994. With these, The Gap targeted three

tiers of consumers: Banana Republic for the

upscale, Old Navy for discount shoppers, and

The Gap for everyone in between.

Old Navy in particular took off, reaching 1

billion in sales by 1997.

I was in store number one for Old Navy and I

remember walking out, calling

back, and saying to my boss

I've just been in the coolest, cheapest

store on the face of the earth.

And Old Navy was back in those days.

They were the fastest retailer to go

from zero dollars in sales to a billion

dollars in sales.

The company simultaneously expanded

worldwide. It opened the first international

Gap store in England in 1987 and expanded to

France and Japan in the 90s.

Finally, The Gap embodied the casual-cool,

basic trends of the 80s and 90s.

The casualization of the American wardrobe

continued into these decades as offices

began allowing increasingly casual attire.

Where The Gap really kind of took off was

casualization in the office.

The last leg of casualization came really

when people started wearing khakis to work

on Friday.

Casual Friday is the easiest way to think

about that.

The Gap made improbable clothing, like khakis

and turtlenecks, cool.

In 1993, it released an ad campaign

featuring dozens of celebrities in khakis.

A few years later, actress Sharon Stone wore

a Gap turtleneck with an Armani jacket to

the 1996 Oscars.

Gap's annual sales grew from 307 million in

1980 to over one billion just seven years later.

By 2001, sales had ballooned to 13.8

billion.

When you adjust for stocks, Gap traded for 20

cents when Drexler took over in 1983 and

peaked at 52 dollars in 2000.

Wow, what a spectacular run, with the last

big leap coming from the rapid expansion of

Old Navy right before the turn of the

century.

At that time, though, the U.S.

economy slowed down.

The Gap's sales grew at 28 and 17 percent in

1999 and 2000, but slowed to 1 percent in

2001. It hasn't hit double digits since.

But a sluggish national economy was only

part of the problem.

First, by the early 2000s, Gap's apparel had

lost its cool.

Casual basics gave way to Britney

Spears-esque low-ride pants and crop tops,

which weren't Gap's forte.

Banana Republic and Old Navy carried the

company as The Gap brand struggled to

deliver what consumers wanted.

Next, the boardroom was in turmoil.

In 2002, then-CEO Mickey Drexler retired

after two years of sluggish growth.

Drexler's design-driven leadership had

faltered when trends changed in the early

2000s. The company replaced Drexler with

Paul Pressler, a former Walt Disney

executive. Pressler used the cost-cutting

ethos he developed at Disney to improve

Gap's efficiency.

It seemed to work.

Sales growth rebounded to 9.7

percent in 2003.

But a New York magazine profile from the

time noted that this uptick was likely due

to products that Drexler chose before his

departure. And it didn't last: sales growth

fell back to under 3 percent the next year,

then slipped into the negatives.

Glenn Murphy, former CEO of the Canadian

drugstore chain Shoppers Drug Mart, took

over in 2007.

CNBC reported at the time that Murphy

planned to give the design team creative

freedom, reflecting Gap's continuing

struggle to be cool again.

As sales in the U.S.

fell, Gap again pursued growth abroad at a

much faster pace than in the 80s and 90s.

From 2006 to 2008, the company opened dozens

of Gap and Banana Republic stores across the

Middle East and Southeast Asia.

But then of course, the Great Recession

devastated Gap and just about every other

retailer. Whether The Gap was cool or not

hardly mattered.

Consumers slowed or halted apparel shopping

to save money.

Under Murphy's leadership, The Gap tried

several methods to revive sales.

It embraced strategies to integrate digital

and physical shopping experiences, like

allowing customers to shop online and pick

up items in store.

Gap also acquired two new companies:

Intermix, a women's fashion brand, and

Athleta, a fitness and athleisure brand.

Athleta in particular, capitalizing on the

spike in athleisure's popularity, has

succeeded where other Gap brands have

struggled. From 2008, when Gap acquired the

brand for 150 million dollars in cash, to

2014, the Athleisure brand grew from an

online-only presence to about 80 stores.

Gap doesn't break out Athleta's sales

numbers specifically, but the other portion

of its revenue, of which Athleta is a part,

consistently posts the best sales growth in

the company.

During Murphy's leadership, Gap's overall

sales trended upward again, reaching a peak

of 8 percent growth in 2012.

But Murphy stepped down in 2014 and sales

drifted downward once again.

The company hasn't yet released its 2019,

earnings but sales at Gap stores fell every

year from 2013 to 2017, and Banana Republic

fared just as poorly.

Millennials have flocked to digitally-native

brands like Everlane, fast-fashion giants

like H&M, or even secondhand companies like

ThredUp. Fast-fashion retailers in

particular have captured a rapid fire

wardrobe replacement rate driven by social media.

And I've seen it dozens of times in the mall

where people are shopping and they already

own a ton of clothing in their wardrobe.

But things have already been all over social media and so they don't want to wear it again.

Old Navy and Athleta have carried the company

for the last few years.

To expand on Athleta's success, Gap launched

a men's athleisure line, Hill City, in 2018.

Meanwhile, Old Navy leans on its

family-friendly prices and shopping experience.

They know how to really integrate the right

fashion of the moment for their customer at the right price.

And I think they are doing a great job.

Old Navy is of particular importance to the

company, making up over 40 percent of its sales since 2014.

By 2020 though, the discount brand will

become its own company.

This will leave The Gap with two struggling

behemoths, The Gap and Banana Republic

brands, and a mixture of much smaller

brands: Intermix, Athleta, Hill City, and

the newly-acquired children's clothing line

Janie and Jack.

Analysts point to Athleta as the brand with

the most potential to drive future growth.

I think that a lot of people would have

assumed Athleta would have been grouped with

Old Navy. It will be the crowned jewel, it

will need to carry, it will represent the

growth. But it's also going to be benefiting

by being part of a larger company.

Gap's current CEO, Art Peck, said the split,

which should be complete by 2020, will help

each company craft a "sharpened and

strategic focus and tailored operating

structure." But why now, when the retailer

has struggled for consistent success for so long?

I think the reality is it appears it's an

acknowledgment that The Gap really isn't

going to turn as quickly or as much as they

had wanted it to.

If NewCo does revive the ailing company, it's

possible that the iconic Gap brand itself

will play a smaller role than it did in the

company's history.

Certainly going to be, relatively speaking, a

much less important part of this business

once you separate them off.

So if you can shrink Gap and grow Athleta

fast, grow Hill City fast, those pieces are

more important to the shareholder.