Can Gap Escape the Whirlwind? New CEO confronts Years of Decline

By guest author Suzanne Kapner from Wall Street Journal

Sonia Syngal is plotting a future of fewer stores and more fashion risks to revive the company’s namesake brand

Sonja Syngal CEO of Gap. All Captions and graphics courtesy by Wall Street Journal

In late March, Gap Inc., the perennially struggling retailer, temporarily closed all its North American stores in response to the Covid-19 lockdown and lost 70% of its revenue overnight.

Four days later, Sonia Syngal took over as CEO.

The pandemic has washed out many companies that were already on shaky ground, especially in retailing. J.Crew Group, Neiman Marcus Group Ltd. and J.C. Penney Co. have filed for bankruptcy protection, and others have lost millions in sales and profits.

Ms. Syngal’s job is to avoid that vortex, in part by fixing Gap, the company’s namesake brand that some financial analysts say is so troubled that it is worth less than zero. She holed up in her San Francisco Bay Area house, working so many hours her children delivered food to her home office to make sure she was eating.

The CEO’s first step, like many U.S. retailer leaders, was to go into emergency cost-cutting mode and raise USD 2.25 billion in fresh capital. In three years, the Gap brand that helped define America’s malls will have exited many of them.

Then Ms. Syngal, 50, set to work reforming the San Francisco company’s culture, which she deemed lumbering and risk-averse. With stores closed, she hit on a simple observation: Gap, the company, had a golden, neglected asset in Gap, the brand.

The company had spread resources into other lines—Old Navy, Athleta, Banana Republic—and Ms. Syngal saw an opportunity to focus back on the oldest. The gambit will be a highly visible test of whether a struggling company in an industry highly exposed to the pandemic can right itself in time.

“I realised that we had to go on offense, or we were going to go down a very dark road,” she said. After the departure of Ms. Syngal’s predecessor, she became the company’s fourth CEO in 18 years.

Among the challenges is luring back Gap’s customers, who in recent years have moved on to other clothiers such as H&M, Uniqlo and Everlane.

The brand “hasn’t articulated what they stand for,” said Ivan Wicksteed, a former chief marketing officer at Old Navy who left in 2015 and now works for a health-care-technology company. “If you try to be everything to everyone, you end up being nothing.”

Gap Inc.’s net sales fell 30 % to USD 5.4 billion in the six months to Aug. 1, and losses totalled USD 994 million, compared with a USD 395 million profit a year earlier. The Gap brand’s same-store sales rose 12 %—the first time they turned positive since 2017—but analysts said the gain was skewed by temporary store closures.

The company’s stock closed at USD 21.42 on Friday, October 23, 2020, up nearly fourfold from its 25-year low of USD 5.50 in April, compared with a 36 % increase in the S&P 500 Apparel Retail Sub Industry Index.

The Gap brand accounted for slightly more than a quarter of the company’s USD 16.4 billion in annual sales last year.

“Gap is the big question mark,” Ms. Syngal said. “It’s the brand that has been under duress for a long time.

Special place

Gap, founded in 1969, holds a special place in American fashion. The brand’s affordable clothes, emblematic of an upbeat and casual lifestyle, became such a cultural icon that Sharon Stone wore a Gap shirt to the 1996 Academy Awards. The company over the years added Old Navy and other brands.

Over the past decade, the Gap brand has careened from one look to another. One year, according to former executives, it wooed younger, budget-minded consumers by competing with fast-fashion chains. The next, it went after higher-income shoppers by selling USD 600 leather jackets.

Kim Hancher of San Rafael, Calif., used to frequent Gap stores in her 20s. The 49-year-old style coach said she doesn’t anymore, because “the cut became big and boxy and the styles are no longer current or cute.”

Even as sales shrank over the past six years, the brand was producing too many clothes, said former employees including Trey Bachus, who was an assistant store manager at a Gap in Houston until 2018. Stores would get far more items than they could display, he said.

The excess was kept in overflowing stockrooms and required steep markdowns to clear out.

“We’d get 300 peach T-shirts, and that is a colour that doesn’t sell,” said Mr. Bachus, now an Aéropostale Inc. store manager. “Consumers don’t want to dig through massive amounts of clothes.”

“That is a very good history lesson,” Ms. Syngal said. “But we’ve put in place proven leaders over these functions.”

The company’s other brands have fared better. Athleta, a sportswear chain, connected with women in the growing athleisure space. Old Navy has grown in nine out of the past 10 years. Citigroup Inc. analyst Paul Lejuez assigns a negative value to the Gap brand and much smaller Banana Republic brand.

The Gap brand, he said, has been “dying for a decade.”

By the start of 2020, Gap Inc.’s stock price had lost more than half its value over five years, while the S&P 500 Apparel Retail Sub Industry Index had risen 36.8%.

At its 2001 peak, there were about 1,850 Gap stores around the world and the chain could be found in most U.S. shopping malls. By the beginning of the March lockdowns, it had about 1,170. The company has roughly 3,800 global locations in total, including Old Navy, Athleta and Banana Republic and franchised stores.

Art and science’

Born in India, Ms. Syngal grew up in Montreal, where aunts taught her to sew. She made her own clothes and prom dresses for friends. “I believe in art and science,” she said, referring to the marriage of the creative process with data. “Both are really innate to the fashion business.”

An engineer by training, she was a Ford Motor Co. product manager, spent 10 years at Sun Microsystems Inc. and joined Gap Inc. in 2004 as a vice president of sourcing strategy. She took over Old Navy in 2016, boosting its store footprint in North America and Mexico and developing its e-commerce capabilities. Before she left, Old Navy’s sales started to slide.

In early November, the company announced the departure of Art Peck, who had been CEO since 2015 and had set a plan in 2019 to split the business into two companies. It also warned of another quarter of weak sales and lowered its profit targets for the year. Mr. Peck couldn’t be reached for comment.

In January, the company abandoned plans to split off Old Navy as it searched for a leader. By March, the company, like other nonessential retailers, was going into lockdown mode and promoted Ms. Syngal to CEO.

Ms. Syngal said she realised that, to succeed post-Covid, the company needed to be “super clear” about what each brand represented. Old Navy and Athleta were best positioned. Old Navy sold casual, affordable clothes from stores in strip centers, which were benefiting as shoppers shunned enclosed malls, according to Ms. Syngal. Athleta was resonating with its message of empowering women and girls, she said.

On Thursday, (Oct. 22), Gap Inc. laid out plans to expand both brands, estimating that by 2023 Old Navy and Athleta would account for nearly 70 % of net sales, up from just over half today.

Banana Republic was more vulnerable. Before the pandemic, it was a “nice, healthy business,” Ms. Syngal said, but with people working from home, its career clothes were not in demand. Her team set about shifting its focus to more-casual attire such as fleece sweatshirts and slouchy cardigans.

The Gap brand was the most at risk but also presented a great opportunity as pandemic-weary shoppers sought out casual clothes, a category the brand helped invent, Ms. Syngal said. She first had to slim it down by closing its weakest stores.

On Thursday, the company said it planned to close 350 Gap and Banana Republic stores in North America by 2023. By then, 80% of its fleet will be outside of enclosed malls. It also announced a review of its European stores.

The Gap brand is cutting the number of items it sells by a fifth, trying to bring in younger shoppers with new partnerships and placing bets on trending styles, said Ms. Syngal and Mark Breitbard, who runs the Gap brand.

Culling the Gap brand’s sprawling selection is part of Ms. Syngal’s turnaround strategy. Mr. Breitbard, who has spent nearly a decade with the company in various roles, is in the process of reducing the number of dresses and styles in other categories at the brand. “Our task is to get cleaner points of view and make the store and website easier to shop,” he said. “I can’t speak for every era at the company, but we have been obsessed with quality for a number of years and it’s proving out.”

The brand is also placing bigger bets on trending styles such as its Sky High jeans for women, with a waist that comes up over the navel. That is a departure from how the brand did things before, when it tried to offer styles for everyone. “When we do it right,” Mr. Breitbard said, “we’re reinventing the classics.”

Bennett Heyn, a 20-year-old student at Ohio State University, said he recently bought a Gap T-shirt and was so impressed with the quality he went back and bought a second. “It’s thicker than most T-shirts,” he said.

Ms. Syngal said she is pushing executives to take risks by forming partnerships and moving faster to get ideas to market. A sense of urgency was evident in how quickly Gap launched a teen line this spring. Executives had discussed the possibility in January, and once Ms. Syngal became CEO, she pushed them to get it done. The first styles for girls were delivered in April, and were such a success that a boy’s line was quickly added.

“We did not deliberate it too much,” Ms. Syngal said. Executives had talked about launching a teen line many times in the past, realizing that consumers who aged out of Gap Kids didn’t return to the brand until they became adults, but never acted on it, she said.

Mr. Breitbard and his team also didn’t deliberate too much before striking a deal in June with musician Kanye West’s fashion company Yeezy to produce a Gap collection that will debut next year. While the partnership holds the potential to deliver younger consumers, it also thrusts Gap into the unpredictable celebrity and political worlds.

In September, Mr. West suggested on Twitter he should have a Gap Inc. board seat. “Black board seats matter,” he wrote. Some customers tweeted for a boycott of the brand over Mr. West’s support of President Trump. Gap Inc. spokeswoman Adrienne O’Hara declined to comment on the board request, saying “this partnership is not about politics.” A spokesman for Mr. West didn’t respond to a request for comment.

The company’s shares rose 24 % in the three days after the deal was announced.

“We might have considered that riskier in the past,” Ms. Syngal said of the partnership with Mr. West. “There would have been a million reasons to say no.”