Can Gap Inc. Really Manage A Comeback?

Even following an earnings report that almost no one would term as a win for his company, one really has to hand it to Gap Inc. CEO Arthur Peck.

Usually, when sales are down, revenue is off and foot traffic is falling, many CEOs look to the world of outside forces and headwinds to explain their woes. This year, so far, the unusually warm Q4 weather, the Internet and fast fashion have been been the common enemies across anemic retailer earnings reports.

But Peck went a slightly different and somewhat refreshing route in his call with analysts last week in the wake of the release of yet another weak earnings report. He called out, occasionally with great specificity, what went wrong in the product lines that his company brought to its customers.

“So, we just had huge quality misses,” Peck noted. “Literally, places where whether it was the fit or the quality of the fabrication, it made the product very difficult to wear. I think I’ve cited this before, but we had blazers in Banana Republic women’s assortment, where it was extremely difficult for the average woman to actually get her arm into the armhole.”

Usually, when consumers rate a brand “not wearable,” they merely mean that it’s kind of ugly or unflattering. Gap Inc., it seems, crossed into a new gold standard for retail misses with clothing that could not actually be worn, and there is something oddly admirable about a CEO that can own up to that.

But then, Peck didn’t really have much of a choice, since Gap Inc.’s most recent quarterly report — not to mention the last year or so since Peck took over as CEO — required an apology or, at least, an explanation. And a plan for going forward, since, as of right now, it seems that, at best, Gap brands are standing still and, at worst, going backward.

Peck has such plan and has a very enthusiastic delivery of it for investors. But Gap has been in a turnaround for a while now, and, so far, actual turns have remained more theoretical than observed, making it an open question about how long investors will want to stay tuned.

Some Ugly Earnings Figures

The most enthusiastic reviews that Gap’s latest earnings brought in were “lackluster” — opinions, more or less, went downhill from there. Gap Inc. reported profits of $213 million, down from $319 million at the same time a year ago. Revenue was down 7 percent year over year in Q4, while same-store sales also fell 7 percent.

The least negatively affected brand was Old Navy, which saw flat same-store sales in FY2015, after growing by 5 percent in FY2014. Banana Republic was the hardest hit brand; its year-long same-store sales were down 10 percent, after being flat the previous year. The flagship Gap brand was the most consistent performer, though we imagine that Gap Inc. would prefer if its performance was consistently good. Gap brands saw same-store sales decline 6 percent this year, after declining 5 percent last year.

Still, despite noting the difficulties, Peck remained pretty bouyant, if blunt, with investors.

“Despite our disappointing performance, it’s important to highlight some of our strengths as we enter 2016. First, we believe that our size and portfolio of brands are a competitive advantage in areas such as sourcing, real estate and eCommerce; second, as our track record has demonstrated, we, of course, plan to maintain our operating discipline; and finally, our reliable cash generation and strong balance sheet allow us to make investments in areas like technology and supply chain needed to win in this evolving retail landscape over the long term.”

Moreover, though the comeback has been long forecasted, he believes that the pieces are now properly in place to make that happen.

“With a year of transition behind us, I’m confident that we have the right strategies in place to fuel our long-term growth,” said Peck. “We made significant progress in 2015, transforming our product operating model, enabling us to be more responsive to trends and market conditions and consistently deliver on-brand product collections. Our brands are strengthening their connections with customers through digital, and especially mobile, enhancements that create richer experiences, whether shopping online or in stores or any combination of channels.”

So, how is Gap doing all that?

Fashion Forward Is Overrated

Peck spoke a lot of being a more “responsive” brand, which various industry experts have tagged as a clever way of noting that Gap Inc., even in its highline Banana Republic Brand, is getting out of the “taste-making” business.

“We took Banana to a place where we were trying to lead on fashion and trend, and [the customer] does not want Banana to be that,” Peck noted, perhaps alluding to the firm’s high-profile partnership with designer Marissa Webb that ended up being one of last year’s more high-profile fashion missteps when it came to missing consumer taste.

Peck noted instead a returned focus on an older school design standard: “We have centered on the classic, appropriate, expected aesthetics of the brand.” That return to standard, Peck noted, is predicted to be a surprise as the firm’s data shows Banana Republic’s foot traffic remains strong; it’s just that consumers aren’t converting when they get there. Possibly because they have been unable to get their arms into the clothing.

And while the shift to classics was most specifically called out by Peck in regards to the BR brand, Peck had similar insights on what the reformation plan for Gap Inc.’s merchandising will be.

“We’re always going to have some style misses, obviously. Design’s job is to push creatively, and merchandising’s job is to counterbalance that with a commercial orientation. We all, across our brands and frankly across the industry, one of the bigger style misses of last year was tops went to a silhouette that was a little bit shorter and a little boxier. And many women voted that it wasn’t very feminine and wasn’t very flattering. And it was a style that was out there, but it was a style that frankly didn’t really register with a lot of customers and that’s a good learning,” Peck noted. “The word femininity is one that continues to be one that I’m pushing to the front, whether it’s across tops or bottoms.”

Mobile’s “Win-Or-Lose” Moment For The Gap

Peck spent much of his time talking to investors calling out the increasing role of mobile in the Gap’s business and how the firm had reached the tipping point where the majority of its customers are first entering its doors digitally through a mobile device.

“This year, the bulk of our traffic will be mobile traffic to our digital space,” Peck noted. “That represents an opportunity because a great majority of that traffic is incremental, but it also means that we have to offer the customer an emotional, immersive, holistic, engaging brand experience, along with what we have historically done extremely well, which is a very efficient eCommerce transactional experience.”

That, according to Peck, has meant several attempts at streamlining and modernizing the eCommerce shopping experience so that it is seamless as a standalone or in conjunction with an in-store experience.

“We’re modernizing our POS. I’ve talked about that before. We’ve built a number of omnichannel capabilities. We’ve virtualized our inventory so that we have access to all of our inventory across all of our demand. The thing that I am really excited about is the accelerating pace of mobile and the mobile experience that we have. Historically, we’ve operated our websites in two separate platforms. We’re in the process of bringing those together on a fully responsively designed website. And, most importantly, we’re going through a cultural change inside the company of really thinking digital first and mobile first.”

Of course, Gap Inc. is a retailer in trouble, so any promises it makes about doing it all differently should be taken with the appropriate grain of salt. After showing losses or flat performance in every imaginable metric, it would not be a great time to talk about doing the exact same things.

But, it seems, at least, Gap Inc. knows its two main problems and is working pretty diligently on the repairs. The clothes aren’t appealing, and consumers want to buy them in different ways.

If Gap can get both of those up and working again — no small feat considering it is a simultaneous effort — that talk of a comeback could start looking like a reality.