I worked in a team and we were asked to evaluate Gap, Inc. and give specific recommendations for future growth and prosperity. This is the report we created based on our research and findings.

1. Gap Inc. Filling The Gap: Building a Bridge to Future Prosperity PM Cluster 107 Professor Carter Professor Coombs Professor Matta Professor Wright May 1, 2009 Team 7G Joseph Burns Max Feldman Patrick Fogt Justine Holtkamp Justin Schiff

2. Executive Summary Recent Economic Downturn The current economic downfall has caused consumers to drastically change their spending habits. This reduction in spending has severely impacted businesses from every industry, and the specialty retail industry is no exception. A majority of specialty retailers have seen a dramatic slowdown in growth and sales. The Gap must continue to grow by taking advantage of their market share. With so many resources available, The Gap has the unique ability to take risks in order to combat the limitations of their weaknesses. Several efforts must be made to ensure the company’s ability to continue dominance in producing revenue and conveying value: Update the Shopping Experience: Innovative Customer Relationships Management Systems give companies ample opportunities to better serve their customers through greater personalization. Application of Data Mining techniques will allow The Gap to analyze their market basket and increase customer acquisition, retention and loyalty. Strengthen the Brand Image: A lack of brand identity has recently plagued The Gap’s ability to differentiate themselves amongst the growing threat of a highly competitive retail clothing market. Implementing and using an identifiable logo on apparel will increase brand recognition. As an industry leader, The Gap must use their resources to increase their recognition as an innovator amongst environmentally friendly stores. Increase Global Presence: With such a volatile U.S. market, it is important to combat downturns through global diversification. With a redefined and focused brand image, The Gap will have the capabilities and resources to regain their status as the largest retailer in the world. Proper research into advantageous markets, as well as hiring employees that understand cultural differences, are the most important of many vital steps to achieving international prominence. Financial Status Successful and effective implementation of these strategies will greatly effect the financial status of The Gap versus its competition. The effect of these changes, as well as the current status of these financials in terms of liquidity, efficiency, profitability, leverage, and market value will be highlighted. While The Gap is an industry leader in some of these categories, there is also room for improvement. Steps of effective implementation of the provided strategies are designed to improve The Gap in these areas. 2

3. Table of Contents 3

5. Assessthe current condition of the company

6. Benchmarkthe company against key competitors

7. Provide strategic direction to tackle company and industry issues

8. Discusshow to effectively implement these strategies

9. Evaluate the impact of recommendations on the company’s financial position and performance4

10. Industry Analysis During a time of economic recession, it is necessary for consumers to find ways to cut corners and save money. One easy solution for those looking to reduce spending is to make it a priority to only purchase items they really need rather than what they desire. This philosophy has led to tremendous struggles for major players in the specialty retail clothing industry. In fact, According to the National Retail Foundation, specialty retail apparel sales in 2008 decreased by 17 percent (Great American Group, 2009). This reduction in sales has forced companies to find new and creative strategies that will not only help them survive, but also allow them to thrive in the future. However, before they can take this step, they must analyze how well or how poorly they are doing in comparison to the competition. 17% Specialty Retail Sales, 2008 Source: Google Images, 2008 5

12. United Kingdom

13. France

14. Ireland

16. Accessories

18. Women

19. Teens

21. Gap

22. Banana Republic

23. Piperlime

24. AthletaDeclining sales across the specialty retail industry has contributed to increased competition between retailers. According to the S&P Sub Industry Outlook (2009), “Companies with stronger brands, differentiated products, superior customer service, and attractive price-value propositions are likely to outperform their peers.” Source: Corporate Information, 2009 “Comparable store sales decreased 12 percent compared with a decrease of 4 percent last year.” Source: 2009 Form 10-K 6

25. SWOT Analysis 7 Source: Gap SWOT, 2008

27. For the most part, have been approximately as liquid or more liquid than top competition in each of the past 3 years,

28. However, in the last two years, the ratio has dropped significantly, meaning they have been less liquid

29. The Gap must find more effective ways of converting their receivables into cash if they hope to stay ahead of their competition.The Gap is easily able to meet their short-term liabilities as a result of high liquidity. Source: The Gap, AEO, J. Crew, A&F financials, 2006-2008

31. Already doing much better than the industry average, with an inventory turnover of 9.6 in 2008, as opposed to the average of 5.

32. Relatively similar to their competition

33. Could take advantage of additional resources and large market share to create more progressive supply chain management systems.“You need to optimize your supply chain, make your production processes lean, and optimize your relationship to your customers.” Source: Bierley, 2008 Source: The Gap, AEO, J. Crew, A&F financials, 2006-2008 9

35. While in the past two years they were behind the competition, The Gap is currently generating more earnings from their assets than any of their top competitors.

36. This is commonly a result of improved management techniques, which could be linked to hiring new CEO Glenn Murphy in 2007.The Gap is currently generating more earnings from their assets than any of their top competitors. Source: The Gap, AEO, J. Crew, A&F financials, 2006-2008

38. While being highly leveraged can allow greater returns, having a larger portion of your assets financed by debt can also bring larger risk

39. The Gap does an excellent job of controlling its debt compared to competitor J. Crew, which is extremely highly leveraged

40. To maintain a low debt ratio, The Gap must set goals to pay off debt as quickly as possible. Source: The Gap, AEO, J. Crew, A&F financials, 2006-2008

42. Its competitors are considered to be ‘Mid-Cap’ companies, meaning their values are between $2 billion and $10 billion.

43. The Gap has a much higher market capitalization than its main competitors.

44. This indicates The Gap has more shares outstanding than any of its competitors, and occupies a larger market share.

45. The Gap should use their enormous market capitalization to expand in areas where the competition can not. Source: The Gap, AEO, J. Crew, A&F financials, 2006-2008 12

47. Retailers must make sure they are constantly adapting to a changing world that grants customers access to new technology and allows for a more personalized shopping experience.

48. Customers must feel excited through a memorable and enjoyable shopping experience.

49. The drab and plain appearance of stores must be improved to make things appear more animated and appealing.

50. There is a lack of effective use of resources that stem from such a large market share.

52. There is no real logo to speak of that identifies where the customer purchased the product

53. There is a lack of a marketing campaign that sparks the interests of loyal or potential shoppers.

54. The Gap has struggled to find an identity and design apparel that is unique to their stores.

56. There are not great enough efforts to make a name as a ‘global specialty retailer’; offering stores in a variety of foreign countries have yet to produce a large percentage of their revenue.

57. It is important that The Gap continues to move forward and market around the world to combat their international competitors.

58. With The Gap having such a large market share, giving it more capabilities and resources than its competitors, why not continue to push its name in foreign countries?13

59. Update the Shopping Experience In a world with so many advertisements, companies must advertise to those who want to purchase the products, not just the anonymous masses. High-end retail stores often use the tactic of providing a personal shopper for their most important customers. Why not provide these services to every single customer? In order to keep existing customers satisfied and spark interests from new customers, The Gap must use their immense resources and size to revamp the way people shop. Additionally, many companies in other industries have experienced great success through their creation of a personalized shopping experience. 14

60. Update the Shopping Experience 15

62. Track shopping habits through the year

63. Send coupons for favorite items before a birthday

64. Create a personalized catalog

65. Design an interactive Facebook application

66. Incorporate preference for new items or sales into promotions

67. Encourage items that will fit customer’s body type

68. Promote a new and innovative shopping experience

69. Advertise other subsidiaries according to customer budget $ Cost per store: $4000-6000 Source: Wright, 2009 16

70. Update the Shopping Experience 17 Source: Marshall, 2008

72. It is important to note those customers that are resistant to suggestions about their own style that are simply based on previous purchases. However, those that do not wish to acknowledge suggestions will still have the ability to browse the store themselves.

73. Costs of implementing a system are relatively small compared to the overall spending of The Gap each year. The shear size of the company will allow the company to cover such costs in the short term with the hope that the benefits from implementation will outweigh these costs in the long run. Clearly, the benefits of this concept will outweigh the costs with proper efforts to decrease resistance to such technology.18

74. Strengthen the Brand Image In struggling economies, marketing budgets are often early casualties. A company positioned for success should not follow this trend. “Studies show that brands that maintain or increase marketing spending in a recession tend to do better than their rivals in the long run” (Cowlett, 2008). Recessions provide opportunities for improvement while others are tightening their wallets. The only way to combat the economic slowdown in specialty retail is to increase sales. This can be achieved through increased marketing efforts. It is essential to identify the needs and preferences of ever-changing consumers and direct efforts towards them effectively. This can mean marketing using previously unconventional means, like internet, text, and park bench advertisements. Opinion leaders may also be used to create product buzz. Weak brand image and brand loyalty are hurting the company. The Gap must strengthen and reposition their brand to give it a new, unique identity. They must revamp their offerings to create a brand that speaks to consumers through style and value. This value must emphasize of a strong history of trust, durability, and high quality. Use of a logo, development of a green line, and other promotional tools showing their products’ advantages should be utilized to create demand. Through utilization of these ideas, The Gap can increase their already dominant market share and strengthen the brand. By effectively using marketing efforts, The Gap can reconnect with their customers and develop strong customer relationships that will address their lack of brand loyalty. “Brands that increase advertising during a downturn can improve market share and return on investment.” Source: Quelch, 2008 19

75. Strengthen the Brand Image Benefits of Using a Logo: Proposed new Gap Logo to appear on apparel “You need a brand makeover when the marketplace tells you so directly: Sales are slowing and market share is shrinking.” The Gap’s sales are down and they are losing market share. Most successful specialty retailers use some sort of logo to set their products apart from competition. The Gap has not yet followed this lead, however the development and use of a logo on The Gap’s product will have many benefits. Consumers will be able to instantly recognize Gap’s brand. It evokes emotions and feelings about a product and its benefits. The logo creates a status, and labels are often the reason people buy specialty retail items. Overall, the use of a logo distinguishes The Gap’s products from competitors’ and uplifts the brand’s status. - Source: 3 Benefits, Commercial Link Online Source: Johnson, 2008 20

77. Hemp

78. Bamboo

79. Recycled Polyester

81. More expensive21

82. Strengthen the Brand Image “Great brands communicate in a consistent manner and create a unique position in the marketplace.”Source: Jacques, 2009 Advantages There are several advantages to strengthening The Gap’s image. It will lead to better positioning and increased brand awareness and recognition. They will also be able to gain market share through designing an eco-friendly line of clothing. The use of a logo will increase The Gap’s status and develop strong customer relationships, eventually leading to brand loyalty. All of these components will allow for The Gap to increase its sales and improve market share and profitability in the long run. Limitations Although there are several advantages of The Gap strengthening its brand image, there are also limitations to consider. It takes time to implement changes in a brand and to design effective campaigns. Additional costs of designing and implementing a logo and green line, as well as advertising costs must be considered. In order to incorporate a green line into their product offerings, The Gap must locate new sources for environmentally sustainable materials. Overall, the advantages outweigh the limitations. 22

83. Increase Global Presence 12% International stores’ sales contribution While The Gap already identifies themselves as a “global specialty retailer”, efforts can be made to live up to this ideal. The improvements in technology, low costs of doing business in foreign countries, and increasing trade alliances have led many businesses to expand internationally. The Gap is no exception. Currently, 12% of The Gap’s sales come from international markets, totaling nearly $2 billion in sales (GPS Quarterly Sales). This number could be improved significantly with the addition of new stores in growing markets. The company currently operates franchises in 14 countries, including Ireland, France, the United Kingdom, and Japan. Plans for expansion into Singapore and Malaysia in 2009 include 30 new stores. With such a large market share already, The Gap must use their resources to do what many specialty retailers lack the ability to: expand. If they continue to make their way into foreign markets, they will be in a position to become the world’s largest specialty retailer. Over 800 stores in the U.S. have been closed in the past six years. However, if The Gap uses the funding from the closed stores and enters growing wealthy markets like Europe and the Middle East, they will obtain a competitive advantage. 14 Countries with The Gap’s stores 30 Stores to open in Singapore & Malaysia in 2009 800 U.S. stores closed in past six years Source: GapInc.com, 2009 Source: Hoovers F.O., 2009 23

84. Increase Global Presence Steps for Implementation: 24

85. Increase Global Presence Advantages By increasing The Gap’s global presence, the company will be able to achieve many benefits. Global brand recognition and brand loyalty will lead to increased revenues. The Gap will gain an increased global market share, giving them a competitive advantage. By expanding into growing markets, The Gap will not be placing all of its resources into the struggling U.S. economy. A globally diverse company is better positioned to ride out the effects of a recession and improve profitability over time. Limitations Although the benefits of globalization clearly outweigh the downfalls, the limitations merit discussion. Potential problems include cultural barriers, such as language, customs, and different styles and trends. Another potential problem is the risk of a new endeavor. It is difficult to determine how a company will fare in a new market. However, this is why the research stage of implementation is so crucial. Clothes will still cost the same amount to make, but may not produce as high of returns because they will have to be adjusted for the weakness of the U.S. dollar against other global currencies. 25

86. Forecasting While sales have decreased over the past 3 years, we believe that if Gap Inc. were to follow our recommendations they could see this trend reversed. Sales are expected to increase by as much as 15% in the first year after recommendations have been put into effect and plateau off at around 10% for the following four years. Updating the shopping experience and strengthening the brand image will increase comparable store sales immediately. Additionally, application of these concepts to expanding foreign markets will cause an immediate surge in revenues. 10% Estimated increase in sales each year 2010-2014 26

87. Forecasting Despite our recommendations, we project these ratios to stay consistent with where they were in 2008. However, the true issue for The Gap is not with their ratios and the way they manage their income. We consider this to be one of their strengths. The true benefits of our recommendations can be seen through an increase in revenues. As an industry leader in most aspects of ratios, it is more important for The Gap to focus on increasing their market share while maintaining these strong ratios. Projected 2014 Ratios with Increased Market Share The Gap must maintain strong ratios while increasing market share. 27

88. Conclusion When The Gap was founded in San Francisco in 1969, their intentions were to bridge the gap between the baby boomers and their children. Their new logo represents their efforts to bridge the gap between their current efforts and future success. The green undertone of the logo portrays the desire to become more globally friendly. Furthermore, they must alleviate the pressures of their weaknesses by updating the shopping experience, strengthening the brand image, and increasing their global presence. As a leader in the specialty retail industry, The Gap must make these efforts in order to continue their dominance. From these ideals, a new mission statement can be followed that focuses all of the future aspirations of the company as a whole. 28

89. Mission Statement: “To establish stores that creatively appeal to all specialty retail shoppers and continue to ‘Bridge the Gap’ across generations. Focus growth efforts through progressive technology, environmentally friendly practices, global expansion, an enhanced shopping experience, and a strong brand image.” 29

90. References Abercrombie & Fitch. (2006-2008). Form 10-K. SEC Filing. American Eagle Outfitters, Inc. (2006-2008). Form 10-K. SEC Filing. Bierley, J. (2008). Vital Enterprises: Inventory Turnover. Retrieved April 23, 2009, from http://www.vitalentusa.com/learn/turnover.php. Carmichael, E. (n.d.). 3 Benefits a Logo Gives Your Brand. Retrieved April 20, 2009, from http://www.evancarmichael.com/Starting-A-Business/849/3-Benefits-a-Logo-Gives-to-your-Brand.html. Commercial Link Online. (n.d.). The Benefits of Having a Logo. Retrieved April 20, 2009, from http://www.commercialinkonline. com/Logo_Benefits.pdf. Corporate Information Snap Shots. (2009). Gap, Inc. Retrieved April 25, 2009, from http://www.corporateinformation.com/Company-Snapshot.aspx?cusip=364760108. Cowlett, M. (2008, October). Make every penny count. Human Resources (09648380), Retrieved April 25, 2009, from Business Source Complete database. Gap, Inc. (2006-2009). Form 10-K. SEC Filing. GapInc.com. (2009). GPS Quarterly Sales. Retrieved April 27. 2009, from http://www.gapinc.com/public/documents/GPS_Quarterly_Sales.pdf Gap SWOT. (2008). Datamonitor: Company Profile. Retrieved April 24, 2009, from Business Source Complete database. Godin, S. (2007). Reorganizing for profit. Retrieved April 2, 2009, from http://sethgodin.typepad.com/seths_blog/2007/07/reorganizing-fo.html. Google Images. (2009). Retail Sales Stalling in the U.S. Retrieved April 25, 2009, from http://en-us.nielsen.com/etc/medialib/nielsen_ dotcom/en_us/images/pictures/consumer_insight/issue_14.Par.55792.Image.gif. 30

91. References Great American Group. (2009). Specialty Retail Apparel. Industry Outlook, 108, Retrieved April 4, 2009, from http://greatamerican.com/gagimages/specialty%20retail%20apparel.pdf. Hoover’s. (2009). Full Overview: The Gap. Retrieved April 27, 2009, from Business Source Complete database. Hoover’s. (2009). History: The Gap. Retrieved April 27, 2009, from Business Source Complete database. Jacques, A. (2009, Winter2009). Creating a Brand New You: Why Personal Branding ls So Crucial Today Learning from Icons such as Coca-Cola and McDonald's. (cover story). Public Relations Strategist, 15(1), 32-33. Retrieved April 21, 2009, from Business Source Complete database J Crew. (2006-2008). Form 10-K. SEC Filing. Johnson, E. (2008). Entrepreneur: Brand Makeovers: 3 Lessons in Reinvention. Retrieved April 18, 2009, from http://www.entrepreneur.com/marketing/branding/article198836.html. Marshall, G., Solomon, M., & Stuart, E. (2008). Marketing: Real People, Real Choices. New Jersey: Pearson Prentice Hall. George, M. (2009, March). Trending Upward. Wearables, 13(3), 57-62. Retrieved April 22, 2009, from Business Source Complete database. Quelch, J. (2008). Harvard Business School Working Knowledge: Marketing Your Way Through A Recession. Retrieved April 19, 2009, from http://hbswk.hbs.edu/item/5878.html. S&P Sub-Industry Outlook. (2009). The Gap. Retrieved April 21, 2009, from Business Source complete database. Wright, J. (2009, April 6). Personal interview. 31

92. Appendix A Benchmarking Source: Form 10-K 32

93. Appendix B Income Statements Source: Form 10-K 33

94. Appendix C Balance Sheets Source: Form 10-K 34

95. Appendix C (cont.) Balance Sheets Source: Form10-K 35

96. Appendix D Forecasted Income Statement 36

97. Appendix E Forecasted Balance Sheet 37

98. Appendix E (cont.) Forecasted Balance Sheet 38

99. Appendix F Forecasted Retained Earnings 39

100. Appendix G Forecasted Ratios Predicted Ratios 40