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Gap & Old Navy outline strategies ahead of spin-off

Old Navy will almost double its store count across North America as part of plans to reach US$10bn in annual sales following its split from Gap Inc next year – with its supply chain key to driving margin expansion and more frequent purchases.

The next steps for the two businesses were revealed during a 'Meet the Management' investor event yesterday (12 September), which saw executives update on the planned separation into two independent publicly traded companies, as well as an overview of strategic priorities for the new Gap Inc and Old Navy.

The split, which was first announced in March, will see Old Navy become a standalone company while the group's remaining Gap, Athleta, Banana Republic, Intermix and Hill City labels will operate under the new Gap Inc.

The spin-off is aimed at enabling each company to maximise focus and flexibility, align investments and incentives to meet its unique business needs, and optimise its cost structure to deliver profitable growth.

Old Navy

With $7.9bn net sales in 2018, Old Navy is eyeing more than $10bn in annual net sales in the long term, with its growth strategy including plans to drive online growth, build its market share through category focus and expansion, acquire new customers through personalisation and "multi-tender loyalty," and double its fleet to about 2,000 stores in North America.

Reaching these goals will see Old Navy open about 75 stores annually, with a focus on off-mall locations in "under-served" small markets – a move it says will result in lower unit volumes. The additional stores will boost Old Navy's portfolio by about 860 locations, taking the total count to around 2,000 from the current 1,140.

Meanwhile, Old Navy also plans to "win with product" by driving its market share through an expansion of its plus-size offering and, in the longer term, a focus on intimates.

In her presentation to investors, Old Navy global brand president and chief executive officer Sonia Syngal explained the chain makes, designs, sells and ships 700m products a year – "and we use our supply chain to give us cost and flexibility advantages.

"Over the years we have developed deeper and deeper relationships with our top suppliers: currently about 20 suppliers make up about 60% of our sourcing spend. And as these relationships have deepened and strengthened, what we can now deliver in the value sector we could not have delivered a few years ago."

She also noted that: "Inventory optimisation is something we think will give us opportunity in the years ahead," not just a localised assortment fine-tuned to better serve customers, but also being able to optimise against impacts such as the weather.

"This summer, our customers in the middle of the country preferred capri pants, our customers in the West Coast preferred skinny jeans, and our customers in Manhattan wanted to participate in our high-rise wide leg. These are all examples of store level localisation that we want to go after in a big way; and when you think about those 700m units, a few pennies across that sheer number of units drops a lot of value to the bottom line.

"Testing, and minimising risk against fashion volatility is also critical. While we've made good progress in terms of responsive units, we think there's a lot of potential in more holistically testing our assortment before we buy it. And so that will be a priority for us as well."

The company is also eyeing the end-to-end digitisation of the product creative process. "A modern PLM system, 3D design and full integration with our top vendors will unleash product innovation, speed and drive efficiency."

Specifically, Old Navy identified six key investment highlights:

  • Unique brand positioning at the intersection of value and speciality apparel;

  • Large and growing customer base with levers to drive lifetime value;

  • Multiple growth drivers: new stores, online, new categories;

  • Highly-profitable store fleet complimented by a strong e-commerce business;

  • Strong financial model with significant cash flow generation;

  • Mono-brand focus and capital resources for growth.

"Separation unlocks value – the simplicity of a mono-brand drives speed and focus," Old Navy says.

Gap Inc

Meanwhile, for the new Gap Inc, the game plan is to improve profitability at its two "iconic brands" Gap and Banana Republic, as well as drive momentum at the company's "growth brands."

At its namesake brand, plans include working to improve margin and to "lead in denim" with a focus on improving product quality, fit and style. The road ahead offers a "meaningful opportunity to recapture profitability through fleet rationalisation, cost reduction, operational discipline and gross margin expansion," the company says.

At Banana Republic, the product focus will be on dresses, knits, denim, and woven tops, with plans to expand sizing online in a bid to recapture "historical levels of profitability" through gross margin expansion and operational discipline.

With its Athleta brand, Gap Inc says it will move to capitalise on the sweet spot of converging and accelerating macro, lifestyle, and values trends.

The company also plans to launch an international business through franchise for its Janie and Jack kidswear brand.

Overall, six points that will define the new new Gap Inc are:

  • Consumer-relevant brands with large, complementary and loyal customer bases;

  • Strong omnichannel platform;

  • Advantaged capabilities to efficiently deliver quality products and experiences;

  • Scale that drives profitability and growth;

  • Leading the way in sustainability and social responsibility;

  • Focused game plan to improve profitability and drive growth.

Susan Anderson, an analyst at B Riley, notes: "While we believe both companies will benefit from increased focus on the brands as a separate company, it is difficult to determine at this point whether the return on the about $1bn break-up cost is greater than deploying that cash elsewhere and keeping the company together."

She adds, however, that despite several quarters of softer sales performance, management believes Old Navy is coming into the separation from a position of strength and is "well-positioned to grow as an independent company."

The outlook for Gap Inc success, meanwhile, relies on being able to fully leverage the shared advantages of having multiple brands on the same platform, Anderson says, noting "which we think will be more unified following the spin-off of Old Navy.

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