How The Gap Inc. (GPS)’s Focus on Brand Made the Difference

Page 1 of 2

Over the past year, The Gap Inc. (NYSE:GPS) has undertaken a massive turnaround. From the beginning of 2005 to the start of 2012, Gap’s stock had dropped 13%. The company had become the fashion equivalent of white bread — everyone had it but no one cared about it. Then everything changed. Management refocused on the core brands, changed the way that design was approached, and worked out the kinks in production. Since the start of 2012, the stock has risen 65%, and The Gap Inc. (NYSE:GPS) seems to be back on top.

There’s still lots left in the tank, and the company has managed to climb to new heights by doing something seemingly simple — it focused on its core strengths. No diworsification, no brand-new business lines, no learning to love again. Just a simple single-mindedness that we could all learn from.

The Gap Inc.Demanding performance from the core brands
In its lackluster years, two of Gap’s brands became muddled. Gap and Old Navy both sell similar sorts of merchandise, with Gap products occupying a slightly higher tier of quality. But that division broke down when Gap used cheaper materials in its products and started to fall behind in time to get new product to market. The brand quickly fell in customers’ eyes, and sales walked out the door. To correct that problem, The Gap Inc. (NYSE:GPS) spent most of 2012 redefining its eponymous brand.

As a result, the company moved away from discounting merchandise, an in the last reported quarter, gross margin was up 4 percentage points to 41%. The success of the rebranding also meant that Old Navy became more differentiated. That resulted in the largest revenue increase across the three brands, with third-quarter revenue up 9% on comparable-store sales of 9%.

If there’s a scenario that can highlight the reverse of that brand strength, it’s Coach, Inc. (NYSE:COH)‘s last quarter. The handbag retailer still has a strong brand, but its holiday sales were rough. For a big part of the shortfall, we can point to Coach’s management team as they took their eye off of the company’s core product line. While men’s and international sales did well — up 50% and 12%, respectively — sales of women’s handbags in America sank. That dragged the whole business down for the quarter and resulted in a dragged-down comparable sales of 2%. Clearly, the company has a little work to do, though with a gross margin still over 70%, it shouldn’t be too much work.

Expanding the range, not the type
The focus that Gap had and which Coach lacked came from knowing what it did best and tweaking those areas. Even in its expansion, Gap managed to play it safe. The biggest push last year came from the company’s Athleta line, which challenges Lululemon Athletica inc. (NASDAQ:LULU) for yogawear sales. The business segment containing Athleta increased revenue by 31% last quarter. Earlier this year, the company completed the purchase of Intermix, a high-end clothing retailer with locations across the United States. While the Athleta brand is sporty and Intermix is high-end, both are simply versions of the apparel store.

Page 1 of 2