Business Cluster Project

Professor CarterProfessor CoombsProfessor MattaProfessor Wright

May 1, 2009

Gap Inc.

Team 7GJoseph Burns Max Feldman Patrick Fogt Justine Holtkamp Justin Schiff

Filling The Gap: Building a Bridge

to Future Prosperity

PM Cluster 107

Executive SummaryRecent Economic DownturnThe current economic downfall has caused consumers to drastically change their spending habits. This reduction in spending has severely impacted businesses from every industry, and the specialty retail industry is no exception. A majority of specialty retailers have seen a dramatic slowdown in growth and sales. The Gap must continue to grow by taking advantage of their market share. With so many resources available, The Gap has the unique ability to take risks in order to combat the limitations of their weaknesses.

Several efforts must be made to ensure the company’s ability to continue dominance in producing revenue and conveying value:

Update the Shopping Experience: Innovative Customer Relationships Management Systems give companies ample opportunities to better serve their customers through greater personalization. Application of Data Mining techniques will allow The Gap to analyze their market basket and increase customer acquisition, retention and loyalty.

Strengthen the Brand Image: A lack of brand identity has recently plagued The Gap’s ability to differentiate themselves amongst the growing threat of a highly competitive retail clothing market. Implementing and using an identifiable logo on apparel will increase brand recognition. As an industry leader, The Gap must use their resources to increase their recognition as an innovator amongst environmentally friendly stores.

Increase Global Presence: With such a volatile U.S. market, it is important to combat downturns through global diversification. With a redefined and focused brand image, The Gap will have the capabilities and resources to regain their status as the largest retailer in the world. Proper research into advantageous markets, as well as hiring employees that understand cultural differences, are the most important of many vital steps to achieving international prominence.

Financial StatusSuccessful and effective implementation of these strategies will greatly effect the financial status of The Gap versus its competition. The effect of these changes, as well as the current status of these financials in terms of liquidity, efficiency, profitability, leverage, and market value will be highlighted. While The Gap is an industry leader in some of these categories, there is also room for improvement. Steps of effective implementation of the provided strategies are designed to improve The Gap in these areas.

2

Table of Contents

3

http://madnews.files.wordpress.com/2008/02/gap-logo.png

Introduction - Industry Analysis - Company Analysis - Recommendations - Forecasting - Conclusion

IntroductionThe United States based specialty retail clothing industry has suffered due to the recent economic recession. As the largest retailer in the United States, The Gap must continue to advance in order to maintain their market share. In a world of constantly changing technology and business strategies, many efforts must be made to stay ahead of the endless amount of relentless competitors. A powerhouse like The Gap must use their size and influence to emphasize their strengths and alleviate the pressures of their weaknesses. The structure of the typical shopping experience is changing and retailers are forced to comply to the ever increasing and specialized demands of their customers.

The purpose of this report is to:

• Analyze the performance of the industry

• Assess the current condition of the company

• Benchmark the company against key competitors

• Provide strategic direction to tackle company and industry issues

• Discuss how to effectively implement these strategies

• Evaluate the impact of recommendations on the company’s financial position and performance

4


During a time of economic recession, it is necessary for consumers to find ways to cut corners and save money. One easy solution for those looking to reduce spending is to make it a priority to only purchase items they really need rather than what they desire. This philosophy has led to tremendous struggles for major players in the specialty retail clothing industry. In fact, According to the National Retail Foundation, specialty retail apparel sales in 2008 decreased by 17 percent (Great American Group, 2009). This reduction in sales has forced companies to find new and creative strategies that will not only help them survive, but also allow them to thrive in the future. However, before they can take this step, they must analyze how well or how poorly they are doing in comparison to the competition.

Industry Analysis

Specialty Retail Sales, 2008

17%

Source: Google Images, 2008 5


Company Analysis

Declining sales across the specialty retail industry has contributed to increased competition between retailers. According to the S&P Sub Industry Outlook (2009),

“Companies with stronger brands, differentiated products, superior customer service, and attractive price-value propositions are likely to outperform their peers.”

Net Sales2007: $15.8 billion

2008: $14.5 billionSource: 2009 Form 10-K

Gap Fast Facts:Over 3,100 stores:• United States• United Kingdom• France• Ireland• Japan

Offerings: • Apparel• Accessories• Personal care items

Target markets: • Men• Women• Teens• Children

Subsidiaries:• Old Navy• Gap• Banana Republic• Piperlime• Athleta

Source: 2009 Form 10-K

“Comparable store sales decreased 12 percent compared with a decrease of 4 percent last year.”

Source: Corporate Information, 2009

6


SWOT Analysis

Strengths- Large network of

physical stores

- Strong financial leverage

Weaknesses- Weak performance of comparable stores

- Geographic concentration

Opportunities- Growth in online

retail spending

- Growing global footwear market

- Over 3000 stores worldwide-1000 in uU.S. and 2000 in international locations,- i.e. Canada, U.K., France, and Japan

-Long term debt decreases every year- The company’s long-term debt to shareholders equity ratio was 1.27 in FY2008 compared to 3.63 in 2007

-Steady growth from year to year-Online sales predicted to increase 11.3% until 2012

- Footwear is expected to grow by 7.1% yearly. Gap is taking advantage of this by launching the brand name Piperlime.

- Gap: fall in comparable stores sales by 5% in FY2008 over FY2007-Old Navy: comparable store sales decline by 7% - Due to weak product assortment

- Gap relies too much on the United States (produces 83.6% of the revenues).

- Consumer confidence declined in the last year.

- Labor cost are rising in the US and minimum wage is expected to reach a new high of $7.25 in July of 2009.

- Completion keeps growing each year and are expanding internationally

Source: Gap SWOT, 20087


Liquidity

The quick ratio is an indicator of a company’s short term liquidity. The ratio specifically excludes inventories to show how a business can pay its current liabilities without relying on the sale of inventory. Thus, the higher the ratio, the more liquid a company is.

Quick Ratio = Current Assets - Inventories / Current Liabilities

The Gap Abercrombie & Fitch

American Eagle J.Crew0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

Quick Ratio Comparison

2006

2007

2008

Company

Qui

ck R

atio

8

Quick Ratio

1.5The Gap 2008

Quick Ratio

5.0Industry Average 2008

• The Gap, has a quick ratio greater than 1, a good sign for companies in their industry

• For the most part, have been approximately as liquid or more liquid than top competition in each of the past 3 years,

• However, in the last two years, the ratio has dropped significantly, meaning they have been less liquid

• The Gap must find more effective ways of converting their receivables into cash if they hope to stay ahead of their competition.

The Gap is easily able to meet their short-term liabilities as a result of high liquidity.

Source: The Gap, AEO, J. Crew, A&F financials, 2006-2008


EfficiencyInventory Turnover = Sales / Inventory

Inventory turnover shows how many times a company's inventory is sold over a period of time. A higher inventory turnover ratio is considered a positive indicator of operating efficiency because it implies strong sales.

The Gap Abercombie & Fitch

American Eagle

J.Crew0

2

4

6

8

10

12

Inventory Turnover Comparsion

2006

2007

2008

Company

Rate

of I

nven

tory

Tur

nove

r

Inventory Turnover

5.0Industry Average 2008

Inventory Turnover

9.6The Gap 2008

• To develop a higher inventory turnover, The Gap must find ways to increase sales and decrease inventory

• Already doing much better than the industry average, with an inventory turnover of 9.6 in 2008, as opposed to the average of 5.

• Relatively similar to their competition• Could take advantage of additional resources and

large market share to create more progressive supply chain management systems.

“You need to optimize your supply chain, make your production processes lean, and optimize your relationship to your customers.”Source: Bierley, 2008

Source: The Gap, AEO, J. Crew, A&F financials, 2006-2008 9


Profitability

Return on Assets measures how profitable a company is related to its total assets. Basically, this ratio measures how much we are making on how much we have invested. A higher ROA is better because it concludes that a company is earning more money off of its investment.

Return On Assets = Net Income/ Total Assets


American Eagle J.Crew0%

5%

10%

15%

20%

25%

Return on Assets Comparison

200620072008

Company

Perc

enta

ge o

f Ret

urn

on A

sset

s

10

Return on Assets

3.6%Industry Average 2008

Return on Assets

12.6%The Gap 2008

• The Gap’s ROA is slowly rising from year-to-year

• While in the past two years they were behind the competition, The Gap is currently generating more earnings from their assets than any of their top competitors.

• This is commonly a result of improved management techniques, which could be linked to hiring new CEO Glenn Murphy in 2007.

The Gap is currently generating more earnings from their assets than any of their top competitors.



Leverage

The debt ratio indicates the percentage of a company’s assets that are financed with debt. A firm that has more assets than debt will have a lower debt ratio. The lower the ratio, the better off a company will be in the long run.

Debt Ratio = Total Debt / Total Assets

The Gap Abercombie & Fitch

American Eagle J.Crew0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%Debt Ratio Comparison

2006

2007

2008

Company

Perc

enta

ge o

f Deb

t

11

Debt Ratio

42%The Gap 2008

Debt Ratio

39%Competitor Average 2008

• The Gap is moderately leveraged because it uses a reasonable amount of debt to finance its assets

• While being highly leveraged can allow greater returns, having a larger portion of your assets financed by debt can also bring larger risk

• The Gap does an excellent job of controlling its debt compared to competitor J. Crew, which is extremely highly leveraged

• To maintain a low debt ratio, The Gap must set goals to pay off debt as quickly as possible.



Market Value

Market Capitalization is a measurement of the total dollar value of a companies outstanding shares. It is used to inform the public of the value of a companies equity.

Market Capitalization = Price*Number of Shares Outstanding


American Eagle

J.Crew0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Market Capitalization Comparison

2006

2007

2008

Company

Eco

nom

ic S

ize

(In

Bill

ion

s)

Market Capitalization

$10.6BThe Gap 2008


$4.2BIndustry Average 2008

• The Gap is considered to be a ‘Large-Cap’ company, meaning its value is between $10 billion and $200 billion.

• Its competitors are considered to be ‘Mid-Cap’ companies, meaning their values are between $2 billion and $10 billion.

• The Gap has a much higher market capitalization than its main competitors.

• This indicates The Gap has more shares outstanding than any of its competitors, and occupies a larger market share.

• The Gap should use their enormous market capitalization to expand in areas where the competition can not.

Source: The Gap, AEO, J. Crew, A&F financials, 2006-2008 12


Strategic Issues1. Updating the Shopping Experience:• There is an inability to enhance the shopping experience for its customers.• Retailers must make sure they are constantly adapting to a changing world that grants customers access to new technology and allows

for a more personalized shopping experience. • Customers must feel excited through a memorable and enjoyable shopping experience.• The drab and plain appearance of stores must be improved to make things appear more animated and appealing. • There is a lack of effective use of resources that stem from such a large market share.• With such a progressive online shopping experience, why not incorporate these ideals within store walls?

2. Enhancing Brand Image:• Suffer from a lack of brand image and recognition.• There is no real logo to speak of that identifies where the customer purchased the product• There is a lack of a marketing campaign that sparks the interests of loyal or potential shoppers.• The Gap has struggled to find an identity and design apparel that is unique to their stores. • How can this dominant firm expect to be successful going forward with such weak brand image?

3. Increase Global Presence:• It is imperative that The Gap focuses less on U.S. overexpansion, and more on global expansion in growing markets. • There are not great enough efforts to make a name as a ‘global specialty retailer’; offering stores in a variety of foreign countries have

yet to produce a large percentage of their revenue. • It is important that The Gap continues to move forward and market around the world to combat their international competitors. • With The Gap having such a large market share, giving it more capabilities and resources than its

competitors, why not continue to push its name in foreign countries?13


Update the Shopping ExperienceIn a world with so many advertisements, companies must advertise to those who want to purchase the products, not just the anonymous masses. High-end retail stores often use the tactic of providing a personal shopper for their most important customers. Why not provide these services to every single customer? In order to keep existing customers satisfied and spark interests from new customers, The Gap must use their immense resources and size to revamp the way people shop. Additionally, many companies in other industries have experienced great success through their creation of a personalized shopping experience.

14


Update the Shopping Experience

Customer Login• Customers login through a touch screen

using their phone number, frequent buyer card, or password each time they enter the store

Data Mining• Customer attributes and preferences from

purchases or surveys such as size, favorite items, styles, spending habits, etc. are logged

Suggestions• Compiled information from online database

incorporates limitless amounts of customer data with suggestions for potential purchases 15



Improved Understandingof the Customer

Shopping Habits

Body type

Style and item

preference

Something as simple as a few touch screens connected to a software system can track the data of every customer in each store. This information can be used to:• Suggest products in terms of the customer’s style• Track shopping habits through the year• Send coupons for favorite items before a birthday• Create a personalized catalog• Design an interactive Facebook application• Incorporate preference for new items or sales into promotions• Encourage items that will fit customer’s body type• Promote a new and innovative shopping experience• Advertise other subsidiaries according to customer budget

$Cost per store:

$4000-6000Source: Wright, 2009

16


Data Mining:

Addressing The Gap’s

Key Strategic Issues

Customer Acquisition: A better understanding of their

target demographic and the preferences of each customer will

give a better understanding of which current customers respond

to specific offers.

Customer AbandonmentSometimes the cost that it takes to attract

certain demographics or individual customers is greater than the benefits of these customers. Department stores have

often used this tactic to identify customers who are not spending enough or return the majority of their purchases.

Market Basket AnalysisDevelopment of promotional strategies based on data acquired from customers

will increase the effectiveness and return on advertising costs. Understanding recent purchases of customers will allow stores

to target customers’ needs and preferences according to their recent purchases.

Customer Retention and LoyaltyMaking sure the most profitable customers return to the store is a great way to build

business. Making special offers and inducements to preferred customers will

give them a sense of value. Afterall, “keeping good customers is less expensive

than constantly finding new ones.”


Source: Marshall, 2008 17



Advantages Limitations

While there are many potential benefits to an innovative shopping experience, there are also a few problems that may arise.

• Many older customers are not experienced in basic computing functions. It is important to make the program very easy to follow for a less tech-savvy crowd. Allowing the opportunity to utilize advanced features that incorporate a younger crowd’s knowledge of technology is also important to keep those customers interested.

• It is important to note those customers that are resistant to suggestions about their own style that are simply based on previous purchases. However, those that do not wish to acknowledge suggestions will still have the ability to browse the store themselves.

• Costs of implementing a system are relatively small compared to the overall spending of The Gap each year. The shear size of the company will allow the company to cover such costs in the short term with the hope that the benefits from implementation will outweigh these costs in the long run. Clearly, the benefits of this concept will outweigh the costs with proper efforts to decrease resistance to such technology.

18


Strengthen the Brand ImageIn struggling economies, marketing budgets are often early casualties. A company positioned for success should not follow this trend. “Studies show that brands that maintain or increase marketing spending in a recession tend to do better than their rivals in the long run” (Cowlett, 2008). Recessions provide opportunities for improvement while others are tightening their wallets. The only way to combat the economic slowdown in specialty retail is to increase sales. This can be achieved through increased marketing efforts. It is essential to identify the needs and preferences of ever-changing consumers and direct efforts towards them effectively. This can mean marketing using previously unconventional means, like internet, text, and park bench advertisements. Opinion leaders may also be used to create product buzz. Weak brand image and brand loyalty are hurting the company. The Gap must strengthen and reposition their brand to give it a new, unique identity. They must revamp their offerings to create a brand that speaks to consumers through style and value. This value must emphasize of a strong history of trust, durability, and high quality. Use of a logo, development of a green line, and other promotional tools showing their products’ advantages should be utilized to create demand. Through utilization of these ideas, The Gap can increase their already dominant market share and strengthen the brand. By effectively using marketing efforts, The Gap can reconnect with their customers and develop strong customer relationships that will address their lack of brand loyalty.

“Brands that increase advertising during a downturn can improve market share and return on investment.”

Brand weaknesses

• Weak brand image• Low brand loyalty• Lack of differentiation• Value is unclear

• Develop and use logo• Green clothing line• Promotional tools• Demonstrate value

19Source: Quelch, 2008


Source: 3 Benefits, Commercial Link Online

-

Makes generic name

unique

Gives brand

personality and

credibility

Establishes brand identity

Adds value and

status

Free advertisi

ng

Distinguishes your

brand from competitio

n

Instant recogniti

on

Benefits of Using a Logo:

“You need a brand makeover when the marketplace tells you so directly: Sales are slowing and market share is shrinking.”The Gap’s sales are down and they are losing market share. Most successful specialty retailers use some sort of logo to set their products apart from competition. The Gap has not yet followed this lead, however the development and use of a logo on The Gap’s product will have many benefits. Consumers will be able to instantly recognize Gap’s brand. It evokes emotions and feelings about a product and its benefits. The logo creates a status, and labels are often the reason people buy specialty retail items. Overall, the use of a logo distinguishes The Gap’s products from competitors’ and uplifts the brand’s status.

Strengthen the Brand Image

Proposed new Gap Logo to appear on apparel

Source: Johnson, 200820


Today more than ever before, the consumer is socially conscious. People are leaning more towards products that are environmentally friendly, even if they do cost more. Specialty retailers can jump on this sustainability bandwagon and employ green practices into their products. While it can be costly to go totally ‘green’, small steps are appreciated by consumers who are adopting this lifestyle trend. By creating a product line that incorporates renewable resources, Gap can gain a competitive advantage with the claim that they are environmentally friendly. Some sustainable materials for clothing are organic cotton, hemp, and bamboo.

Sustainable materials:• Organic cotton• Hemp• Bamboo• Recycled Polyester• SOYBU

Benefits of

Going Green

Potential Drawbacks:• New suppliers• More expensive

“When eco-friendly wear first started, it was a hot topic, but today it’s a lifestyle trend.”


Source: George, 2009

21




Acknowledge & define value

Redevelop products with logo

and design green line

Convey value

through marketing

Develop strong

customer relationshi

ps

Brand loyalt

y

AdvantagesThere are several advantages to strengthening The Gap’s image. It will lead to better positioning and increased brand awareness and recognition. They will also be able to gain market share through designing an eco-friendly line of clothing. The use of a logo will increase The Gap’s status and develop strong customer relationships, eventually leading to brand loyalty. All of these components will allow for The Gap to increase its sales and improve market share and profitability in the long run.

LimitationsAlthough there are several advantages of The Gap strengthening its brand image, there are also limitations to consider. It takes time to implement changes in a brand and to design effective campaigns. Additional costs of designing and implementing a logo and green line, as well as advertising costs must be considered. In order to incorporate a green line into their product offerings, The Gap must locate new sources for environmentally sustainable materials. Overall, the advantages outweigh the limitations.

“Great brands communicate in a consistent manner and create a unique position in the marketplace.” Source: Jacques, 2009

22


12%International stores’

sales contribution

30Stores to open in

Singapore & Malaysia in 2009

800U.S. stores closed in

past six years

14Countries with The

Gap’s stores

While The Gap already identifies themselves as a “global specialty retailer”, efforts can be made to live up to this ideal. The improvements in technology, low costs of doing business in foreign countries, and increasing trade alliances have led many businesses to expand internationally. The Gap is no exception. Currently, 12% of The Gap’s sales come from international markets, totaling nearly $2 billion in sales (GPS Quarterly Sales). This number could be improved significantly with the addition of new stores in growing markets. The company currently operates franchises in 14 countries, including Ireland, France, the United Kingdom, and Japan. Plans for expansion into Singapore and Malaysia in 2009 include 30 new stores. With such a large market share already, The Gap must use their resources to do what many specialty retailers lack the ability to: expand. If they continue to make their way into foreign markets, they will be in a position to become the world’s largest specialty retailer. Over 800 stores in the U.S. have been closed in the past six years. However, if The Gap uses the funding from the closed stores and enters growing wealthy markets like Europe and the Middle East, they will obtain a competitive advantage.

Increase Global Presence

23

Source: GapInc.com, 2009Source: Hoovers F.O., 2009


Steps for Implementation:1. Close less profitable U.S. stores in areas where same store sales are severely down and devote those resources elsewhere.

2. Research areas where people will have higher disposable income than many do currently in the U.S.

3. Use segmentation to manage, target, and evaluate desirable global markets.

4. Ensure new markets have similar fashion sense to the U.S., and has an affinity for U.S. based specialty retail.

5. Establish franchise agreements with popular companies to put stores in a given country.

6. Hire experts who can advise the company on effective global store design.

7. Hire bilingual managers to communicate with employees and customers on location, as well as headquarters in San Francisco.

8. Open doors and watch the excitement of shoppers who have never seen stores like those of Gap Inc. in their country.


24




AdvantagesBy increasing The Gap’s global presence, the company will be able to achieve many benefits. Global brand recognition and brand loyalty will lead to increased revenues. The Gap will gain an increased global market share, giving them a competitive advantage. By expanding into growing markets, The Gap will not be placing all of its resources into the struggling U.S. economy. A globally diverse company is better positioned to ride out the effects of a recession and improve profitability over time.

LimitationsAlthough the benefits of globalization clearly outweigh the downfalls, the limitations merit discussion. Potential problems include cultural barriers, such as language, customs, and different styles and trends. Another potential problem is the risk of a new endeavor. It is difficult to determine how a company will fare in a new market. However, this is why the research stage of implementation is so crucial. Clothes will still cost the same amount to make, but may not produce as high of returns because they will have to be adjusted for the weakness of the U.S. dollar against other global currencies.

25


ForecastingWhile sales have decreased over the past 3 years, we believe that if Gap Inc. were to follow our recommendations they could see this trend reversed. Sales are expected to increase by as much as 15% in the first year after recommendations have been put into effect and plateau off at around 10% for the following four years. Updating the shopping experience and strengthening the brand image will increase comparable store sales immediately. Additionally, application of these concepts to expanding foreign markets will cause an immediate surge in revenues.

2010 2011 2012 2013 2014 -

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

Forcasted Sales

Sale

s in

Mill

ions

10%

Estimated increase in sales each year

2010-2014

26


ForecastingGross

Margin37.5%

Equity Multiplier

1.58x

Return on Equity19.3%

Return on Assets12.3%

Net Profit Margin6.4%

Projected2014

Ratios with Increased

Market Share

Despite our recommendations, we project these ratios to stay consistent with where they were in 2008. However, the true issue for The Gap is not with their ratios and the way they manage their income. We consider this to be one of their strengths. The true benefits of our recommendations can be seen through an increase in revenues. As an industry leader in most aspects of ratios, it is more important for The Gap to focus on increasing their market share while maintaining these strong ratios.

The Gap must maintain strong ratios while

increasing market share.

27


Conclusion

When The Gap was founded in San Francisco in 1969, their intentions were to bridge the gap between the baby boomers and their children. Their new logo represents their efforts to bridge the gap between their current efforts and future success. The green undertone of the logo portrays the desire to become more globally friendly. Furthermore, they must alleviate the pressures of their weaknesses by updating the shopping experience, strengthening the brand image, and increasing their global presence. As a leader in the specialty retail industry, The Gap must make these efforts in order to continue their dominance. From these ideals, a new mission statement can be followed that focuses all of the future aspirations of the company as a whole.

28


Mission Statement:“To establish stores that creatively appeal to all specialty retail shoppers and continue to ‘Bridge the Gap’ across generations. Focus growth efforts through progressive technology, environmentally friendly practices, global expansion, an enhanced shopping experience, and a strong brand image.”

29

ReferencesAbercrombie & Fitch. (2006-2008). Form 10-K. SEC Filing.

American Eagle Outfitters, Inc. (2006-2008). Form 10-K. SEC Filing.

Bierley, J. (2008). Vital Enterprises: Inventory Turnover. Retrieved April 23, 2009, from http://www.vitalentusa.com/learn/turnover.php.

Carmichael, E. (n.d.). 3 Benefits a Logo Gives Your Brand. Retrieved April 20, 2009, from http://www.evancarmichael.com/Starting-A-Business/849/3-Benefits-a-Logo-Gives-to-your-Brand.html.

Commercial Link Online. (n.d.). The Benefits of Having a Logo. Retrieved April 20, 2009, from http://www.commercialinkonline. com/Logo_Benefits.pdf.

Corporate Information Snap Shots. (2009). Gap, Inc. Retrieved April 25, 2009, from http://www.corporateinformation.com/Company-Snapshot.aspx?cusip=364760108.

Cowlett, M. (2008, October). Make every penny count. Human Resources (09648380), Retrieved April 25, 2009, from Business Source Complete database.

Gap, Inc. (2006-2009). Form 10-K. SEC Filing.

GapInc.com. (2009). GPS Quarterly Sales. Retrieved April 27. 2009, from http://www.gapinc.com/public/documents/GPS_Quarterly_Sales.pdf

Gap SWOT. (2008). Datamonitor: Company Profile. Retrieved April 24, 2009, from Business Source Complete database.

Godin, S. (2007). Reorganizing for profit. Retrieved April 2, 2009, from http://sethgodin.typepad.com/seths_blog/2007/07/reorganizing-fo.html.

Google Images. (2009). Retail Sales Stalling in the U.S. Retrieved April 25, 2009, from http://en-us.nielsen.com/etc/medialib/nielsen_ dotcom/en_us/images/pictures/consumer_insight/issue_14.Par.55792.Image.gif.

30

Great American Group. (2009). Specialty Retail Apparel. Industry Outlook, 108, Retrieved April 4, 2009, from http://greatamerican.com/gagimages/specialty%20retail%20apparel.pdf.

Hoover’s. (2009). Full Overview: The Gap. Retrieved April 27, 2009, from Business Source Complete database.

Hoover’s. (2009). History: The Gap. Retrieved April 27, 2009, from Business Source Complete database.

Jacques, A. (2009, Winter2009). Creating a Brand New You: Why Personal Branding ls So Crucial Today Learning from Icons such as Coca-Cola and McDonald's. (cover story). Public Relations Strategist, 15(1), 32-33. Retrieved April 21, 2009, from Business Source Complete database

J Crew. (2006-2008). Form 10-K. SEC Filing.

Johnson, E. (2008). Entrepreneur: Brand Makeovers: 3 Lessons in Reinvention. Retrieved April 18, 2009, from http://www.entrepreneur.com/marketing/branding/article198836.html.

Marshall, G., Solomon, M., & Stuart, E. (2008). Marketing: Real People, Real Choices. New Jersey: Pearson Prentice Hall.

George, M. (2009, March). Trending Upward. Wearables, 13(3), 57-62. Retrieved April 22, 2009, from Business Source Complete database.

Quelch, J. (2008). Harvard Business School Working Knowledge: Marketing Your Way Through A Recession. Retrieved April 19, 2009, from http://hbswk.hbs.edu/item/5878.html.

S&P Sub-Industry Outlook. (2009). The Gap. Retrieved April 21, 2009, from Business Source complete database.

Wright, J. (2009, April 6). Personal interview.

References

31

Gap Vs. Competitors

(Ratios)

Current Ratio

The GapAbercombie &

Fitch American Eagle J.Crew2008 1.86 2.41 2.3 1.882007 1.7 2.1 2.71 0.862006 2.21 2.14 2.6 0.76

Quick Ratio

The GapAbercrombie &


Inventory Turnover

The GapAbercombie &


Debt Ratio

The GapAbercombie &


Return On Assets

The Gap Abercrombie & Fitch American Eagle J.Crew

2008 0.1278 0.0956 0.0912 0.088

2007 0.1063 0.1853 0.2142 0.1813

2006 0.091 0.1878 0.1949 0.181


The Gap Abercrombie & Fitch American Eagle J.Crew

2008 10,604,300,000 2,222,400,000 3,202,400,000 995,500,000

2007 14,359,624,450 6,845,076,780 4,123,482,110 3,015,482,083

2006 12,989,059,520 5,907,864,292 6,102,670,971 2,411,259,787

Appendix ABenchmarking

Source: Form 10-K

32


Appendix BIncome Statements

($ and shares in millions except per share amounts) 2008 2007 2006Net sales 14,526 15,763 15,923Cost of goods sold and occupancy expenses 9,079 10,071 10,266Gross profit 5,447 5,692 5,657Operating expenses 3,899 4,377 4,432Operating income 1,548 1,315 1,225Interest expense 1 26 41Interest income (37 (117 (131 Earnings from continuing operations before income taxes

1,584 1,406 1,315Income taxes 617 539 506Earnings from continuing operations, net of income taxes

967 867 809Loss from discontinued operation, net of income tax benefit

— (34 (31 Net earnings 967 833 778Weighted-average number of shares—basic 716 791 831Weighted-average number of shares—diluted 719 794 836Basic earnings per share: Earnings from continuing operations, net of income taxes

1.35 1.1 0.97Loss from discontinued operation, net of income tax benefit

— (0.05 (0.03 Net earnings per share 1.35 1.05 0.94

Diluted earnings per share: Earnings from continuing operations, net of income taxes

1.34 1.09 0.97Loss from discontinued operation, net of income tax benefit

— (0.04 (0.04 Net earnings per share 1.34 1.05 0.93

Cash dividends declared and paid per share 0.34 0.32 0.32

Source: Form 10-K

33


Appendix CBalance Sheets

$ and shares in millions except par value

January 31 February 2,

2009 2008ASSETS Current assets:

Cash and cash equivalents 1,715 1,724

Short-term investments — 177

Restricted cash 41 38

Merchandise inventory 1,506 1,575

Other current assets 743 572

Total current assets 4,005 4,086

Property and equipment, net 2,933 3,267

Other long-term assets 626 485

Total assets 7,564 7,838

LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current maturities of long-term debt 50 138Accounts payable 975 1,006Accrued expenses and other current liabilities 1,076 1,259Income taxes payable 57 30

Total current liabilities 2,158 2,433

Long-term liabilities: Long-term debt — 50Lease incentives and other long-term liabilities 1,019 1,081

Total long-term liabilities 1,019 1,131

Stockholders’ equity: Common stock $0.05 par value

Outstanding 694 and 734 shares 55 55Additional paid-in capital 2,895 2,783Retained earnings 9,947 9,223Accumulated other comprehensive earnings 123 125Treasury stock, at cost (411 and 366 shares) (8,633 (7,912

Total stockholders’ equity 4,387 4,274Total liabilities and stockholders’ equity

7,564 7,838

34

Source: Form 10-K


($ and shares in millions except par value)

February 3,

2007ASSETS Current assets:

Cash and cash equivalents 2,030Short-term investments 570Restricted cash 44Merchandise inventory 1,796Other current assets 589

Total current assets 5,029Property and equipment, net 3,197Other long-term assets 318

Total assets8,544

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities: Current maturities of long-term debt 325Accounts payable 772Accrued expenses and other current liabilities

1,159Income taxes payable 16

Total current liabilities 2,272Long-term liabilities:

Long-term debt 188Lease incentives and other long-term liabilities

910Total long-term liabilities 1,098

Stockholders’ equity:

Common stock $0.05 par value Outstanding 734 and 814 shares

Additional paid-in capital 2,631Retained earnings 8,646Accumulated other comprehensive earnings

77Treasury stock, at cost (366 and 279 shares) (6,23

5Total stockholders’ equity 5,174Total liabilities and stockholders’ equity

8,544

Appendix C (cont.)Balance Sheets

35

Source: Form10-K


Appendix DForecasted Income Statement

The GapForecasted Income Statement

$ in millions

Year 2010 2011 2012 2013 2014

Sales 16,704.90 18,375.39 20,212.93 22,234.22 24,457.64

CoGS 10,440.85 11,484.94 12,633.43 13,896.77 15,286.45

Gross Profit 6,264.05 6,890.46 7,579.50 8,337.45 9,171.20

SG&A 4,483.85 4,932.24 5,425.46 5,968.00 6,564.80

EBIT 1,780.20 1,958.22 2,154.04 2,369.45 2,606.39

Interest Expense - - - - -

EBT 1,780.20 1,958.22 2,154.04 2,369.45 2,606.39

Tax Expense(40%) 712.08 783.29 861.62 947.78 1,042.56

Net Income 1,068.12 1,174.93 1,292.43 1,421.67 1,563.83

36


Appendix EForecasted Balance Sheet

The GapForecasted Balance Sheet

$ in millions

Assets

Current Assets

Cash 1,972.25 2,169.48 2,386.42 2,625.06 2,887.57

Restricted Cash 47.15 51.87 57.05 62.76 69.03

Merchandise Inventory 1,731.90 1,905.09 2,095.60 2,305.16 2,535.67

Other Current Assets 854.45 939.90 1,033.88 1,137.27 1,251.00

Accounts Receivable - - - - -

Total Current Assets 4,605.75 5,066.33 5,572.96 6,130.25 6,743.28

Net Fixed Assets 3,372.95 3,710.25 4,081.27 4,489.40 4,938.34

Other Long Term Assets 719.90 791.89 871.08 958.19 1,054.01

Total Assets 8,698.60 9,568.46 10,525.31 11,577.84 12,735.62

2010 2011 2012 2013 2014

37


Appendix E (cont.)Forecasted Balance Sheet

LiabilitiesCurrent Liabilties

Current Maturities of LTD 57.50 63.25 69.58 76.53 84.19

Accounts Payable 1,121.25 1,233.38 1,356.71 1,492.38 1,641.62

Accrued Expenses 1,237.40 1,361.14 1,497.25 1,646.98 1,811.68

Income Taxes Payable 65.55 72.11 79.32 87.25 95.97

Total Current Liabilities 2,481.70 2,729.87 3,002.86 3,303.14 3,633.46 Long-Term Debt -

Lease incentives 1,019.00 1,019.00 1,019.00 1,019.00 1,019.00

Total Long-Term Liabilities 1,019.00 1,019.00 1,019.00 1,019.00 1,019.00

Total Liabilities 3,500.70 3,748.87 4,021.86 4,322.14 4,652.46

Stockholders' Equity

Common Stock 55.00 55.00 55.00 55.00 55.00

Additional Paid-in capital* 3,305.47 3,636.01 3,999.62 4,399.58 4,839.54

Retained Earnings 11,015.00 12,189.00 13,481.00 14,902.00 16,465.00

Accumulated Other Earnings 123.00 123.00 123.00 123.00 123.00

Treasury Stock* (8,633.00) (8,633.00) (8,633.00) (8,633.00) (8,633.00)

Total Stockholder's Equity 5,865.47 7,370.01 9,025.62 10,846.58 12,849.54

Total Liabilities and Stockholders' Equity 9,366.17 11,118.88 13,047.47 15,168.72 17,501.99

Surplus 667.57 1,550.42 2,522.17 3,590.88 4,766.37

Adjusted Treasury Stock* (9,300.57) (10,183.42) (11,155.17) (12,223.88) (13,399.37)

Adjusted Stockholders Equity 5,197.90 5,819.59 6,503.45 7,255.69 8,083.16

Adj Total Liabilities & OE 8,698.60 9,568.46 10,525.31 11,577.84 12,735.62

2010 2011 2012 2013 2014

38


Appendix FForecasted Retained Earnings

The Gap

Forecasted Statement of Retained Earnings

$ in millions

Common Stock 55.00 55.00 55.00 55.00 55.00

Additional Paid-in Capital 3,305.47 3,636.01 3,999.62 4,399.58 4,839.54

Retained Earnings 11,015.00 12,189.00 13,481.00 14,902.00 16,465.00

Accum. Other Com. Earnings 123.00 123.00 123.00 123.00 123.00

Deferred Compensation - - - - -

Treasury Stock (9,300.57) (10,183.42) (11,155.17) (12,223.88) (13,399.37)

Total 5,197.90 5,819.59 6,503.45 7,255.70 8,083.17

2010 2011 2012 2013 2014

39


Appendix GForecasted Ratios

2010 2011 2012 2013 2014

Total Sales Growth Rate 15% 10% 10% 10% 10%

Comparable Store Sales Growth Rate 15% 10% 10% 10% 10%

Gross Margin 37.5% 37.5% 37.5% 37.5% 37.5%

SG&A as a Percentage of Revenue 26.8% 26.8% 26.8% 26.8% 26.8%

Operating Profit Margin 10.7% 10.7% 10.7% 10.7% 10.7%

Net Profit Margin 6.4% 6.4% 6.4% 6.4% 6.4%

Total Asset Turnover 1.92 1.92 1.92 1.92 1.92

Return on Assets 0.12 0.12 0.12 0.12 0.12

Return on Equity 0.205491 0.201892 0.19873 0.195939 0.193468

Equity Multiplier 1.673484 1.644181 1.618419 1.595691 1.575574

Predicted Ratios

40


Documents

Business Cluster Project