For decades, the Gap defined American fashion. But Gap fell out of vogue not too long after its white denim graced the cover of the namesake magazine. Since 2001, the brand has shuttered nearly 2500 stores, and the stock of its parent company, Gap Inc., significantly underperformed the S&P 500 and competitors like Abercrombie and American Eagle. But the company is trying to turn things around.
It’s back in the cultural conversation with splashy marketing campaigns and hiring high end fashion designer Zac Posen as its creative director. We did some heavy lifting to build the foundation. Now we’re driving really interesting, creative. On top of that foundation and building relevance for the brand.
And Gen Z is taking notice too.
Apparently Gap is a new aritzia, so of course I had to go check it out myself. We’re actually hearing that Gap is kind of cool again, and we haven’t heard that for the greater part of 20 years. It has excited Wall Street and it’s exciting customers. This isn’t a total turnaround just yet, but we’re witnessing the very early innings of a huge renaissance for one of America’s most iconic house of brands.
So how is Gap trying to reinvent itself?
And can it prove to investors that this turnaround isn’t just a passing fad? Gap had 25 stores in 1972. After going public a few years later, its growth soared. By 1999, the brand had over 2100 stores across the world. It was just a few years later that things started to go downhill.
By the end of the 90s and into the 2000, a lot of these other retailers were starting to encroach upon Gap’s strength and the singular kind of position that they had had at that time. The barriers to entry are low. Malls are growing very, very fast. They’re looking for new entrants. And, you know, frankly, there are a lot of players and new entrants.
You know, cheap, fast fashion came about. After its stock price soared in the 1990s. There was a flash of resurgence in 2012 as the company benefited from the skinny jeans craze.
Excitement around international expansion and investor bullishness for athleisure brand Athleta, which was acquired a few years prior. But that momentum was halted in 2014 after the rollout of an unsuccessful campaign called Dress Normal.
It sent sales and the stock price falling yet again. If the definition of kind of what you stand for is sort of “Democratic All-American,” it’s very nebulous. A thousand people can come up with a thousand ideas what that means to them.
And so what, you end up on the other side of that through the entire process design, merchandizing, visual merchandizing is kind of a message that’s very, very diluted. For much of the early 2000, Gap and its sister company, Old Navy, had been generating similar sales but over the past decade, Old Navy has become the powerhouse of the company as Gap fell out of favor with consumers, forcing store closures and sales falling by nearly $3 billion.
For many years, Gap has had to rely on promotions and discounts to move product. They make stuff people don’t want. They’re not doing the right marketing, and so they just discount it into oblivion to be able to actually move product that’s going to have a huge impact on your margins.
It also had become a bloated corporate company. Right.
And so they’ve spent a lot of years doing a lot of layoffs, restructuring the business. Those challenges were felt across the portfolio, including at its namesake brand. We consolidated our SKUs. We rationalized styles, improved quality dramatically. So all of those things, including some things like reducing costs, which are key to making a business healthy but not fun.
Those were setting up a foundation for us to layer on a creative renaissance, really for the brand. After putting in work to right the balance sheet. The cultural revival of Gap began in 2023. It coincided with Richard Dixon taking the helm as CEO. He came from Mattel and is largely credited for the revival of the Barbie brand.
We’re going to continue to operate with discipline against strategic priorities, operational and financial rigor, and that’s what’s going to enable us to really reinvigorate this incredible portfolio. And I think that helps you get someone like Zac Posen. Longtime fashion designer Zac Posen joined as EVP and creative director of Gap Inc. in February 2024. Posen’s main focus is on Old Navy, where he leads the design and merchandizing for the brand.
Old Navy is the most important part of Gap Inc. It’s the largest revenue driver. If Old Navy has a bad day, then it can drag down the entire business. Richard is a marketing guru. You know, marketing is one way to bring back relevancy and one way to generate sales.
But you’re not going to have sustainable sales if you don’t have great product.
And that’s where Zac has come in. Having Zac in the building to help attract creative talent, be a brand ambassador. Do actual design and access red carpet in a way we’ve never had access to or launch Gap Studio. That’s all been a layer on that.
The brands needed for for energy. The company has leaned into viral, celebrity led advertising campaigns. South African singer songwriter Tyla, or Australian pop star Troye Sivan dancing in baggy jeans for its denim collection.
We’ve been in a denim cycle, probably for the greater part of, you know, on the 4 to 5 years, which is right in their wheelhouse. It started during Covid and it’s kind of, you know, that kind of wider baggier leg denim.
They actually executed it flawlessly. When these things are working well. We’re getting so much social media attention that just from consumers that are reposting, that are excited, that are doing the dance themselves, that’s where a little bit of this magic energy starts to develop. The company says it’s trying to move with the speed of culture that can be seen firsthand with its recent Parker Posey Advertising campaign. The actress saw a resurgence in fame this year after starring in The White Lotus, and now she can be seen right above the Gap in Times Square.
The company also told CNBC that it plans to renovate about 40 of its top stores, but has not shared a timeline for how long that will take. When you go into stores, you see better lighting, some better refresh for the experience. It’s also omni, so online we have improved the experience with video Lookbooks better shots of photography so that we can do a better job of selling the product and having a customer see how a style is really going to look on them.
What’s interesting about this partnership is that some of the custom red carpet looks that posed and designed for actors like Timothée Chalamet or Anne Hathaway are actually being sold through its designer line called Gap Studio. People are talking about Gap again.
You look on social media, people are saying this brand is on a comeback. Richard has focused on Gap. That’s where the turnaround is really focused at the moment. But when you are a corporation with four brands, you got to think bigger than just one brand. While Gap and Old Navy’s same store sales, meaning sales at its existing locations have been mostly positive for the past six quarters, Banana Republic and Athleta have been far more inconsistent.
It’s one of the long term challenges they’ve had at Athleta is product acceptance challenges, which is a nice way of saying they made clothes that people don’t like. The focus hasn’t been as much on Banana and Athleta, because turning around Gap and Old Navy are momentous tasks all by themselves, so there’s still more work to be done at Athleta and Banana.
Between 2023 and 2024, Gap Inc’s overall sales grew by about 1%, primarily driven by growth at Old Navy. The 15 billion. Isn’t that high compared to.
I mean, it was well over 16, even ten years ago. So is that good? The way you should look at it now is on that 1%. They are growing that 1% on the highest gross margins that they have had in the past 20 years. When you finally do grow sales, you want to grow it in an extraordinarily high profit generating and healthy manner.
But there are still challenges ahead. This isn’t the first time that Gap has attempted a turnaround.
It’s short lived revival in 2013, for one. This time around, the company needs to prove it can sustain this momentum long term. And it’s not helping that this is a particularly challenging time for apparel retailers who rely on manufacturing overseas.
Gap. Beat Wall Street’s earnings expectations in its fiscal first quarter of 2025, but that was overshadowed by other news that spooked investors. I want to start with the Gap right now. Shares are plunging. Earnings and revenue beat estimates.
But the company warning that new tariffs could impact its business by 100 to $150 million. Looking at a two year stock chart, the company was up about 200% at the end of May. The news surrounding the potential implication of tariffs has since sent the share price tumbling. We’ve already mitigated over half of the anticipated impact of tariffs. We’ve done it through adjustments in sourcing manufacturing assortments, and we remain absolutely committed to achieving additional mitigation over time.
A company like Gap that sells clothes, things that we like to have, but we probably have enough in our closet to get us through a tough economic time.
This poses a huge challenge for them. They also have a very diversified supply chain, but a lot of that supply chain is in Asia. And if President Donald Trump’s reciprocal tariffs remain in effect for those countries, it could have a huge impact on their margins. It could have a huge impact on their price.
When I see the sort of foundation we built, the creative energy we’ve created with the results we’re driving now, that needs to be what our focus is on.
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