It appears that while stretch material may be worn by super heroes, it can’t save the world – or Gap
One thing is for sure, with Gap Inc.’s former CEO Sonia Syngal departing suddenly Monday, the company certainly could do with a saviour after far too many missteps have left the group’s flagship brand Old Navy under-performing and its eponymous apparel operations floundering once again.
Syngal likely started the year believing that Athleta and Old Navy would save the day and revive the group, but falling sales and shrinking margins instead increasingly point to the apparel retailer spinning-off one or other.
The 52-year-old Syngal stepped down just over two years into the role, as the retailer continues to struggle with weak demand for its casual apparel and just weeks after yet more pessimistic sales forecasts.
Syngal had headed Old Navy before being named as group CEO in March 2020 and now executive chairman Bob Martin has stepped in as interim CEO, while ex-Walmart
The fact that Gap Inc.’s shares were off about 8% at just below $8.00 today – with at least six brokerages downgrading their price targets – is probably less of a concern to long-suffering shareholders than the three-quarters plunge in value over the past 12 months.
Syngal Started Well At Gap Inc.
Syngal was tasked with guiding Gap Inc. to safety as pandemic lockdowns bit and initially investors praised her for spearheading body size inclusivity at Old Navy, launching the Yeezy line with Kanye West, and partnering with Walmart to create a home decor brand. Gap Inc. also chose to reignite its franchisee model in Europe after backing out of the U.K. market.
Merchandise errors at its Old Navy brand, which accounts for more than half of company’s sales, supply chain challenges and inflationary pressure have derailed recovery. Earlier this year Gap flagged execution issues at Old Navy and said a shift from more casual attire to formalwear and party fashions had left the brand’s selection “out of sync” with consumers.
“We were defining customer trends too early in the process, and were unable to chase into the right fashion choices closer in,” said Syngal at her last earnings call.
In response, Gap has ramped up promotions and discounting to clear inventory in a move likely to depress gross margins further amid spiralling costs.
While the company previously shelved plans to spin-off Old Navy in 2020 after citing increased costs and complexity in splitting the brands, Credit Suisse analyst Michael Binetti reflected yesterday: “The potential for Gap to announce that it is either exploring strategic alternatives [including an Athleta spin-off] or a large scale SG&A cut is significantly rising upon news of the CEO departure.”
Old Navy Issues Continue
In the meantime, issues at Old Navy look set to spill into next year, and while value brands typically benefit when consumers feel the pinch, the deep discounts to balance inventory have offset any gains.
Cautioning on stock value, Wells Fargo
Last week Athleta announced it will debut outlet stores at Chicago Premium Outlets in Illinois this summer and Leesburg Premium Outlets in Virginia in the fall, as part of plans to open 30-40 new stores in its 2022 fiscal year.
“As part of our long-term strategic growth plan, Athleta is investing in new access points to reach new customers, and expand our community of empowered women and girls,” said Mary Beth Laughton, president and CEO of Athleta.
Gap Inc. has certainly backed its athleisure brand and to date Athleta has added 12 new stores in the U.S. this year, while in June it confirmed it will add four more Canadian locations by the end of 2022, describing the Canadian market as a “strategic growth priority”.
Syngal won’t be around to see whether her turnaround strategy bears fruit and spinning-off one of Gap Inc.’s two star brands may raise capital but also raises the prospect of awkward questions over the long-term viability of Gap and Banana Republic.