Gap Inc. is focusing its growth strategy on its high performing brands, including Athleta, its athletic wear brand that is on track to reach $1 billion in revenue in the next few years.
At the Goldman Sachs Retailing Conference on Wednesday, CEO Art Peck laid out a plan in front of investors to rejuvenate the retail company, which owns Gap, Old Navy, Athleta and Banana Republic, as well as the smaller luxury retailer Intermix. That plan includes a $750 million investment in e-commerce and mobile technologies, closing 200 underperforming Gap and Banana Republic stores, and opening a total of 270 Athleta, Old Navy, and Gap and Banana Republic factory stores, the latter of which sell discounted styles.
The store closures, and overall rejuvenation, come after a string of poor performances by Gap Inc.’s full-price apparel brands, Gap and Banana Republic. Most recently, in the second financial quarter of 2017, comparable sales at those brands fell 1 and 5 percent, respectively. Plagued by lackluster designs and a consistent promotional cycle, both Gap and Banana Republic are struggling to right ship and slowed down by their bloated 2,000-store fleet. Peck chalks the stores’ troubles up to the “customer moving on.”
There are brighter spots for the company. While Old Navy remains the mammoth brand in the group, on track to reach $10 billion in revenue over the next few years, Athleta remains a top priority for Gap Inc. According to Peck, the brand has grown 25 percent each year since 2012, outpacing the growth of the overall athleisure market, which after a several-year boom, has finally started to wane. The industry grew to a value of $45.9 billion in 2016, an 11 percent increase over 2015, but according to NPD Group analyst Matt Powell, that trajectory has fallen off in 2017, thanks to too many players competing in the space.
“We bought Athleta in 2008 when it was quite small, and we see significant runway in front of us today,” said Peck to investors, adding that it’s not being impacted by the slowing growth of the overall athletic wear market.
He attributed Athleta’s success to the brand’s increased speed to market, with new styles getting through the production phase and landing on store floors in as few as six weeks, faster than brands working on wholesale calendars that put production six months before items hit sales floors. Narrowing that production window has become a popular strategy, particularly for mall brands that need to pick up the pace to respond faster to customer behavior and compete with fast fashion companies; Peck said Old Navy’s production cycle is also slimming down to between six and 15 weeks.
“Time is your enemy, in terms of buying the right stuff at the right time and putting it in the right place,” said Peck. “Having a responsive pipeline means we’re chasing market share opportunities.”
The investment in Athleta also entails building on Athleta’s 133-store network by opening more locations. These stores will help flesh out Gap Inc.’s plan to invest in its cross-channel capabilities, which include buy-online, pick-up-in-store; return-to-store; and order-to-store fulfillment options.
Overall, Peck said online and mobile sales are growing by 14 percent year over year, a total of $3 billion, and the company would be spending $750 million to improve its digital capabilities. The highest priority on that front, on top of fulfillments, is a cross-brand integration that will give shoppers product recommendations from all of Gap Inc.-owned brands, as well as a universal shopping cart. Peck said the company’s most loyal customers — those who shop all brands on all channels, and with a store credit card — are worth 10 times more than one-time shoppers, in terms of revenue.
Gap Inc. isn’t letting Athleta be the only one to ride the success of its athletic wear. The company has begun borrowing performance fabrics for apparel at Banana Republic, and has increased its production of athletic wear for Gap and Old Navy, riding the riches of the athleisure market. Even as market growth is slowing down, Peck said it’s easy money.
“[Athletic wear] is not constricted or restrained to Athleta,” said Peck. “We started selling similar styles at Old Navy and Gap, with no interruption to our regular inventory, and we have a multi-hundred-million-dollar business overnight.”