Gap is bullish on its opportunity in China

Gap is bullish on its opportunity in China

US retail giant Gap Inc has said it remains bullish on its long-term growth prospects in China despite the yuan deflation, while also revealing it is on track with its strategic restructuring. 

Although the devaluation of the Chinese yuan has made the headlines this month, CEO Art Peck described the country as “an important area of long-term growth for us” during it latest earnings call, adding: “We are continuing to be very bullish on our opportunity in China."

“We will process the currency devaluation, and the team is working on that right now. I don’t see that really giving us any significant headwinds as we think about the continued growth of the China business,” he explained.

Gap continues to have a very “robust” store pipeline in China, Peck noted, adding that there is no change to the group's strategy, direction, or intensity in China, reiterating the “significant long-term growth opportunity” in the country.

Strategy update

The company saw its second-quarter earnings decline 34% to US$219m, while sales fell 2% to $3.90bn, weighed down by foreign exchange headwinds, West Coast port issues, and restructuring, primarily related to Gap brand.

Peck told analysts he is “pleased” with the progress Gap has made in terms of restructuring the business. The group is on target to close around 140 of the 175 stores it announced earlier this year, having closed around 30 in the first half of the year.

Turning to the Gap brand, Peck said global president Jeff Kirwan's team is now largely complete, with the group having recently appointed Stephen Sare as head of global merchandising. “The team has been focused on spring of 2016 and I’m confident they have been doing the right work to get the business back on track as we get into next year,” he noted. 

Following a review of the brand's adult assortments, Peck said he has seen some “terrific progress” in terms of refocusing what the brand equities are. “I’m not going to stand up at the plate and call which fence we’re going to hit it over, that’s not who I am, but I am confident Gap will make significant progress in spring and I'm very pleased with what I’ve seen in the women’s assortment and the turnaround in the women’s assortment.”

At the same time, the team has been rebuilding the brand's product processes. By using Old Navy as the template, more responsive capabilities have been built, providing a chance to read and react, and to chase into better selling items. While Peck did not reveal what percentage of the collection would be part of the 'in-season open' programme, he said it involves putting products into its stores, testing and then responding in season.

Old Navy, described by Conlumino analyst Håkon Helgesen as the younger family member - "full of energy and enthusiasm" - was the retail giant's only brand that reported growth in the second quarter, with comparable store sales rising 3%.

Peck noted: “Old Navy’s consistency continues to be a thing of beauty. It sits on a platform of product processes that [the team] has built over the last couple of years and now are pretty relentlessly executing season after season.” 

And it's those same product processes Gap is keen on installing at its namesake and Banana Republic brands, with Peck noting: “Old Navy remains our proof point for building products, executing trend, delivering on brand, fon quality, on fit product consistency for the rest of the company.

“We see a very long member of growth for Old Navy. [It has] gained roughly $1bn of market share over the course of the last three years. [It is] continuing to build out its response to supply chain capabilities, platforming fabric, becoming faster and faster in responding to consumer needs.”

Talking about the wider apparel sector, Peck said: “I see a consumer who has confidence, I see dollars being spent and I see an opportunity for us to continue to get more than our fair share. As I look forward I am very optimistic given the work that’s going on inside of Gap and Banana and the continued consistency that I see in old Navy.”

Restoring fit and quality

Meanwhile, Peck said he is “feeling good about” fit, which he believes should be an “asset” for the company. Although the Gap brand has faced some challenges surrounding fit in bottoms, Peck believes this is something the team has been “resolutely focused on”, adding that he has seen some “significant progress”.

The group is also focused on restoring quality in key places where it is relevant and perceptible, and differentiated for the customer. This, Peck said, has been a particular focus at Banana Republic and the Gap brand.

He explained that Gap could choose a yarn in a jumper that's more expensive because of the hand feel it delivers, but the yarn doesn't meet the company's pilling standards, and therefore the customer views it as low quality. This, Peck noted, is “on the radar” of the brand teams, adding that “the customer has a quality expectation that’s an opportunity for us”. Customers should expect to see quality improvement in the back half of the year, Peck added.