Refashioning Gap: CEO Sees the Future in Outlets, Overseas, Online

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Refashioning Gap: CEO Sees the Future in Outlets, Overseas, OnlineGap might be undergoing an extreme makeover, but the chain is no longer the key growth engine of Gap Inc., (GPS) Glenn Murphy, chairman and chief executive officer of the retailer, told a packed room of investors at the Piper Jaffray Consumer Conference in New York Wednesday.

The apparel giant is shifting its emphasis away from its embattled namesake brand -- as well as its other specialty divisions, like Banana Republic -- to stoke its major growth initiatives.

These include expanding its outlet store business and growing its newer divisions, such as the Piperlime e-commerce site and yoga and athletic apparel chain Athleta.

"We're mitigating our dependence on the specialty business in North America [Gap and Banana Republic] ... to mitigate risk," Murphy said.

To that end, the chain will shrink its Gap chain down from about 900 stores today to an estimated 700 stores by 2013 as part of an ongoing contraction of the 41-year-old brand that almost single-handedly redefined casual dressing in America.

Everyone's Going to the Outlets

By contrast, Murphy envisions the addition of about 50 to 60 Gap outlet stores in the U.S, bringing the total to around 250, and also foresees its Banana Republic outlet business expanding by about 40 new stores to around 150. Gap Inc.'s outlets have been a bright spot for the company in in recent years -- consistent with a pattern across the retail industry in this recessionary climate. The outlet business has generated "the highest return on sales," Murphy said. "It's where customers are gravitating."

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These are not your mother's outlets, selling castoff blouses and pants from the parent chain. Gap's plan is to increasingly stock its outlet stores with on-trend merchandise, Murphy said. "I don't want them bringing stripes in the stores if stripes are last year's idea," he said.

Growing the outlet business abroad is another focus. The retailer opened an outlet store in Milan, Italy, this month, and recently expanded into Canada and Japan. China, too, represents a "huge potential" market for the format, he said. It's all part of Murphy's plan to build a "global runway" with the expansion of not only outlet stores, but also flagship stores overseas.

The retailer is not new to foreign soil: In fact, its international business has recently been outshining the North American stores. Stateside, Murphy is also bullish on the growth of Piperlime, Gap's online business, which will add men's product this fall, and Athleta, where the "real estate opportunities are exploding," he said.

Getting Back on the Forefront of Fashion


But that doesn't mean the company is abandoning its U.S. Gap stores, which have been struggling with poor sales, hurt by fashions that have left shoppers cold.

In a bid to reverse the downward trend, Murphy spearheaded a management shakeup and restructuring this year that included the high-profile ouster of chief designer Patrick Robinson; the introduction of new leadership, with Art Peck replacing Marka Hansen as president of Gap North America; and the formation of the Gap Global Creative Center in New York. The division will chose about 75% of the merchandise content for the Gap, Banana Republic and Old Navy divisions, among others.

What's more, the merchants who have been behind the company's international business, competing adeptly against popular global clothing retailers such as Uniqlo, Inditex Group from Spain (which operates Zara in the U.S.) and H&M, "will have a much bigger influence over design and product" for its North American retail brands, Murphy said.

Come fall, when more trend-right product hits the stores, Murphy hopes the Gap stores will "delight" consumers once again, he told DailyFinance. While Murphy said little about what the new Gap merchandise will look like, he was frank about what has gone wrong at the chain.

For one, Gap missed out on opportunities last year to build on its highly successful 1969 jean collection with items like "hot, complementary tops," he said. Although the Gap chain has been the company's Achilles heel, the other divisions have also stumbled.

Old Navy has faltered because it tried to be too much like fast-fashion retailers such as H&M. Meanwhile, Banana Republic got too casual: More work-appropriate clothes will begin to show up in its stores in July, he said.

The overall apparel business has been pummeled by the worst inflationary pressures and raw material cost increases -- specifically, cotton -- in 30 years, Murphy said. Could Gap Inc. have prepared better by ratcheting up product orders before cost increases kicked in? Yes, Murphy conceded.

To mitigate ongoing commodity price hikes, the retailer is now working more directly with fabric mills, and is using fewer vendors, as well as choosing ones more willing to keep costs down, Murphy said. "For spring, we've completely changed our strategy," he said.


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