Gap is looking to grow its operating margin beyond 13%

Gap is looking to grow its operating margin beyond 13%

US clothing giant Gap Inc has set its sights on growing operating margin beyond 13%, as it looks to gain a larger share of the US$1.4 trillion global apparel market. Key to this is building a more responsive supply chain, seamless inventory, international expansion, and omni-channel capabilities.

Over the past five years, Gap has increased its net sales by $1.6bn, expanded operating margin by 260 basis points, and grown earnings per share at a 15% compound annual growth rate.

During its annual investor meeting in San Francisco last week, the company outlined its ambitions for the next 12 months and beyond. 

Responsive supply chain
"World class" supply chains are no longer just execution engines," said Sonia Syngal, executive vice president (EVP) of global supply chain at Gap.

"Today's best-in-class supply chains drive real value through flexibility and speed in order to respond to customer demand."

Key elements of a responsive supply chain, the retailer says, include fabric platforming, vendor-managed inventory, rapid response, and test and respond.

Vendor-managed inventory, in which key merchants keep a pool of finished goods they can draw on for replenishment, is targeted at longer-life products and enables better in stock levels.

Rapid response, meanwhile, is aimed at seasonal products so the company can read demand and react to the colour, size and silhouette customers are buying. This, Syngal says, can help take the volatility out of investments, allowing it to shift the assortment from underperforming styles to better performing ones.

Test and respond for fashion items allows the retailer to assess customer style preferences so it can buy into known demand.

These components are underpinned by fabric platforming, which allows Gap to leverage its scale and drive average unit cost (AUC) savings, respond quickly within a season, and drive simplicity. 

Gap anticipates 50% of its product assortment will be on the responsive supply chain model by the end of 2016.

FBR Capital Markets analyst Susan Anderson believes the benefits of this initiative could benefit operating margins by more than 60 basis points through reduced AUCs and higher full-priced sell-throughs. 

Seamless inventory
Since launching its ship from store capability, Gap has been working to better match its inventory allocations across channels, geographies, distribution centres and stores, according to Tom Keiser, EVP of global product operations. 

Key to this has been trying to unlock pools of inventory to address supply and demand imbalances, which Keiser says, is "essential" in a global and technology-driven environment.  

Once in place, Gap will use advanced, predictive analytics to assess real-time data that will allow it to get product to its customers when and how they want it. 

The retailer has implemented global fit and global labels, allowing it to sell and move products across various markets. 

It currently has seamless inventory for its China geographies and Athleta brand, and in the group's UK distribution centre, it will co-locate stores and online inventory. 

Anderson sees this initiative helping the retailer to better compete with the likes of Zara, H&M and Uniqlo.

International expansion
Gap has a significant and rapidly growing retail presence internationally, with plans to open 75 franchise stores this year set to take its total to around 450 stores.

And China - where the apparel sector grew more than 11% to more than $180m last year - continues to be seen as the biggest growth opportunity. 

The company expects sales in the country to more than triple from $300m in 2013 to $1bn in the next three years, to become its second-biggest market. 

Drilling down even further, growth is likely to be driven by Gap's Old Navy brand, outlets and e-commerce, according to Anderson. 

Following the launch of its first Old Navy store in Shanghai earlier this year, Gap will open four more stores under the same banner this year. 

"In a market with growing a value sector, estimated in the $50 to $60bn range, and family as a cultural cornerstone, we believe Old Navy has a huge runway ahead," says Jeff Kirwan, president of Greater China at Gap. 

The company's outlet business, meanwhile, is "perfectly positioned" to grow in the emerging value market in China, he adds. 

In addition, online is a strength in a country where the consumer is more engaged in digital and mobile than any other market in the world, Kirwan notes, and Gap is ready to "capitalise" on this growth. 

Omni-channel capabilities
"We remain committed to continuous investment in digital and omni-channel," says Art Peck, president of growth, innovation, and digital.

According to Peck, Gap is listening to its customers to understand what they want most and delivering those digital capabilities rapidly.

These include ship from store, find in store, reserve in store, and order in store, designed to drive customer engagement and loyalty, as well as gain new customers.

In terms of mobile growth, the retailer is also "aggressively" developing innovative technology such as responsive design and easier check-out. 

This, Peck adds, will change how the customer interacts with the Gap brands through mobile devices, and open greater opportunity for engagement and conversion through the growing souce of traffic. 

"Overall, we like Gap's long-term trajectory and believe it is investing in the right areas to compete on a global level, but we would wait for a better entry point or evidence that the Gap brand is back on track," Anderson adds.