Old Navy represents 40-45% of total Gap Inc sales

Old Navy represents 40-45% of total Gap Inc sales

The unexpected departure of Old Navy president Stefan Larsson to become CEO of Ralph Lauren has prompted analysts to ask whether parent Gap Inc can maintain its momentum as it tries to turnaround its Banana Republic and Gap brands.

“The loss of a strong leader inherently creates transition risk, particularly as Old Navy approaches the crucial holiday season and is looked upon to offset weakness at Gap/ Banana Republic,” say analysts at FBR Capital Markets.

Larsson, an industry veteran who spent 15 years at Hennes & Mauritz before joining Old Navy in 2012, is widely credited with leading a recovery at Old Navy, which, under his leadership, enjoyed three consecutive years of profitable growth, adding US$1bn in sales.

He was responsible for the improved merchandise assortment at Old Navy and its highly effective sourcing model, which is being extended to the rest of the company.

This effectively sees a clear brand vision governing every decision in design, merchandising, inventory and production so that the retailer can identify trends, make them relevant to its customers, test them in stores, and respond to demand – buying more of those that sell and quickly moving away from those that don’t.

The goal, of course, is fewer fashion misses and markdowns, driving higher merchandise margins in the longer term.

Another key has been fabric platforming, where the retailer buys large quantities of a particular fabric and creates different treatments, washes and finishes in response to trends – reversing the traditional process where the design comes first.

 “We continue to think that risk of Old Navy performance declines (potentially now increased) outweighs the potential for a Gap turnaround near term, particularly with tougher Old Navy compares and markdown risk with increased inventories,” FBR adds.

Reflecting their concerns, Ralph Lauren’s share price was up 13.6% yesterday (30 September), while Gap Inc’s declined 5.7%.

UBS concurs, suggesting Larsson's departure “reduces our conviction that Old Navy can maintain its momentum – and that the disciplined processes Larsson brought to Old Navy will be successfully transitioned over to the struggling Gap and Banana Republic brands.”

The investment bank goes on to say that Old Navy “has become the shining star of the Gap Inc portfolio," while Gap's struggles continue. “Old Navy represents 40-45% of total GPS sales, but has contributed over 100% of total corporate sales growth over the past six quarters. Importantly, Old Navy is near its historical peak productivity and margin levels.

“We fear that any slowdown in momentum at Old Navy – which seems more likely amid an unexpected leadership transition – could result in outsized headwinds to corporate sales growth and margins for GPS.”

That said, in Stifel’s view, Larsson's absence will likely have little near-term impact as holiday and early spring merchandise decisions have been made.

“We believe that a key to his success has been the strong, deep team he has assembled and their effectiveness at running Old Navy and its design, sourcing, merchandising and marketing efforts.

“Longer term we believe that this team can continue to flourish without Larsson.”

FBR Capital Markets agrees there is “good talent in place” at Old Navy while a search for a new global president gets underway.

Larsson’s interim successor is Jill Stanton, EVP of global product at Old Navy, who has been responsible for design and product functions for the last four years.

Eventually, however, the ultimate successor is likely to be “an individual who is more operationally focused and less transformational – a leader who does not have a desire to overhaul Old Navy’s existing processes.”

Separately, analysts believe Larsson’s new perspective on product and vision could be just what Ralph Lauren needs, and that his first tasks will be to target "low hanging fruit" such as supply chain enhancements, inventory realignment and cost management.

For more insight into Gap Inc’s new approach to product development, click on the following link: Product 3.0 underpins Gap brand turnaround plans.