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Gap Inc.

Gap Inc. A Portfolio Analysis

Submitted By: Pradeep Sapkota (Gap Inc. - Comprehensive Report) Albi Alikaj (Gap Stores) Kristina Daily (Banana Republic) Sony Byanjankar (Old Navy) Moureen Atieno (Piperlime)

Submitted to: Dr. Tim Wise

April 23, 2008

Gap Inc. 2

Abstract
This paper is an analytical overview of Gap, Incorporated and its portfolio members. It describes the birth of the company and goes on to describe its current position. As part of the description process, it includes the four major companies that are part of Gap, Inc. These companies include Gap, Banana Republic, Old Navy and Piperlime. A Managerial Analysis is included herewith that gives an insight into SWOT analysis and Five Forces Analysis of the company, and also included is the Strategic Distinction of the company. As per the Financial Analysis part, financial tools such as ratio analysis, consolidated financial statement comparison, and stock trend are analyzed to assess the companys progress. The paper also keeps close track of companys social, ethical, environmental and managerial aspects in day to day operations. Future expectations and possible diversification or anti-diversification process that the corporation can practice are also part of the paper. It includes the 9-cell matrix to show the existence of company and its portfolio. As a conclusion, the paper sums up ideas from a group of five undergraduate students and incorporates them to breakdown the strategic and financial aspect of Gap, Inc.

Gap Inc. 3

Introduction
Gap, Inc. is a leading American specialty apparel retailer based in San Francisco, California. It sells casual apparels, accessories, and other personal care products for men, women, and children. The products of Gap, Inc. include denim, khakis, T-shirts, boxers, casual wear, and others. It is traded in New York Stock Exchange under the symbol GPS. Currently, the company boasts approximately 150,000 employees and 3,139 stores all around the world. Gap, Inc. sustains a large number of brands, namely Gap, Old Navy, Banana Republic, Forth & Towne, Piperlime, and others. These different companies are bought by the parent company in different times. Started as a general jeans retiling store, Gap, Inc. today has a market value of $13.32 billions. Throughout its history, Gap, Inc. has established itself as a leader in the industry.

Purpose and Values of Gap, Inc.


Gap Inc. is a brand-builder. We create emotional connections with customers around the world through inspiring product design, unique store experiences and compelling marketing. Our purpose? Simply, to make it easy for you to express your personal style throughout your life. We have more than 150,000 passionate, talented people around the world who help bring this purpose to life for our customers. Across our company and embedded in our culture are key values that guide our success: integrity, respect, open-mindedness, quality and balance. Every day, we honor these values and exemplify our belief in doing business in a socially responsible way. www.gapinc.com/public/about

Gap Inc. 4

History
In July 1969, Donald Fisher and his wife Doris went to buy a pair of Levis jeans in a department store. But they could not find a pair that would fit him, which led them to feel that the demand of jeans has out-weighted supply. With this knowledge, the couple started a store in a small shop near San Francisco State University. This store only carried records and Levis jeans. The immediate response from young customers led Fisher to open other outlets. As the 1970s arrived, the appeal for jeans grew thus leading to high growth of the company. $2.5 millions in sales in 1971 increased to $97 million in 1976 with 186 stores in 21 states. As the recession of 1970s arrived, Gap had to react by changing the lines of clothes to a larger variety. They started selling their own labels which was later aided by appointment of Mickey Drexler as a CEO in 1980s. In May, 1988 the corporation was reincorporated in State of Delaware. The company had huge success in late 1990s with net income surpassing $824.5 millions. Before this, Gap, Inc. purchased Banana Republic in 1983. Banana Republic was a catalogue retailer selling safarithemed clothes. This transformed Banana Republic from a rookie in clothing business to a well established business womens store. The other major addition to Gap, Inc.s portfolio was Old Navy which was established in 1994. Started as Gap Warehouse, Old Navy quickly proved to be one of the best sellers in retailing history. Gap, Inc. later took a huge step in 2006 with the inclusion of Piperlime.com, which sells private branded shoes. With an inclusion of all these different brands, Gap, Inc. is a leader in apparel industry. It has established itself as a specialty in this industry. With the inclusion of Piperlime, Gap, Inc. tried to diversify its customers and increased the appeal from e-commerce. The major brands of Gap, Inc. include Gap, Banana Republic, Old Navy, and Piperlime. A close look into these four specific brands included herewith.

Gap Inc. 5

Gap
Albi Alikaj

Gap Inc. 6 Until the acquisition of Banana Republic in 1983, Gap stores were a synonym to Gap, Inc. since it was the only segment in the company. Gap is regarded as a distinct brand in casual apparel retail store. It is one of the four members of Gap, Inc., and it was created in 1969 with the opening of the first Gap store. Gap is considered the parent member of Gap Inc., and it was the base for the success of the other segments, including Old Navy, Banana Republic, and Piperlime. Gap offers extensive selections of classically styled, high quality, casual apparel at moderate price points. Products range from wardrobe basics such denim, khakis and T-shirts to fashion apparel, accessories, personal care products for men and women, ages teen through adult, and maternity apparel. Regarding the price range of the brand in the company, Gap is located between Old Navy and Banana Republic, with more expensive products than Old Navy, and less expensive than Banana Republic. Although Gap has been criticized for blandness and uniformity in its selling environments, the firm claims that it offers products from appeal to unique markets by developing multiple formats and designs. Gap Jeans, for example, offers a huge variety of jeans. In 1986 and 1989, Gap entered the children's apparel market by introducing GapKids and babyGap, respectively. The goal was to offer the Gap style and quality in casual apparel and accessories to children, aged newborn through pre-teen. GapKids clothing is known for style, durability, and value with products such as active-wear, school uniforms, graphic Ts, hooded sweatshirts, polo shirts, pants, jeans, and more. babyGap is an international specialty retailer offering clothing and gift sets for newborn, infant, toddler girls and boys up to the age of five. Products include tops, pants/ jeans, dresses/skirts, sweaters/outerwear, shorts/swimwear, shoes, and bedding, as well as unisex newborn sets. In 1998, Gap launched GapBody which offered women's underwear, sleepwear, loungewear, yoga wear, and personal care products. Gap also

Gap Inc. 7 operates Gap Outlet stores, which carry a similar line of products. Regarding its stores operations, Gap designs virtually all of its products, which are manufactured by independent sources, and sells them with their brand name. The range of merchandise displayed in each store varies depending on the selling season and the size and location of the store. Gap stores generally are open seven days per week and most holidays. All sales are tendered for cash, personal checks, debit cards, or credit cards. In order to attract more customers, these stores redeem gift cards, and also have a private label credit card program through which frequent customers receive benefits. Most of Gap stores' suppliers are located outside the United States by offering lower costs. However, Gap has to deal with issues such as child labor in some developing countries. In India, for example, Gap is trying to rebuild its reputation after a child-labor scandal, where children were hand-embroidering GapKids clothes. Gap said it would refine its procedures to ensure that items made in textile workshops in India were not being produced by children. The company announced the statement after an internal investigation made by a British newspaper, The Observer, which printed pictures of children making clothes for Gap in a sweatshop. According to the newspaper report, some children were as young as ten years old, and they were working for up to sixteen hours a day to embroider clothes, some of them bearing Gap labels and bar codes. This case is one of the issues that Gap has to deal with regarding its store operations. Through the years, Gap has earned the reputation of a brand with a variety of high-quality products. Now, Gap is known throughout the world with more than 1800 Gap stores located in eighteen countries, and they comprise the majority of the stores owned by Gap, Inc. So, Gap has used a vertical integration since virtually all aspects of brand development from product design and distribution, to marketing, merchandising and shopping environments are controlled by Gap.

Gap Inc. 8 One advantage of having a vertical integration is that the company does not have to pay wholesalers and retailers in order to sell its products. Also, by having a direct customer interaction, the company can acquire valuable insights into their preferences. However, it has also made franchise agreements in countries such as Bahrain, Indonesia, Kuwait, Malaysia, Philippines, Saudi Arabia, Singapore, etc. Even though Gap stores can be found in eighteen countries, Gap operates stores only in six countries, including the United States, Canada, the United Kingdom, France, Ireland, and Japan. The remaining twelve countries include the franchise agreements. Currently Gap is not bringing as much profit to the company as expected. Even though the number of Gap stores is almost twice as the number of Old Navy stores, it is still less profitable with net sales of $6,523 in 2007 compared to $6,665 for Old Navy. During 2007, net sales from Gap consisted of 39 percent of total sales for Gap, Inc., with a decline of 4 percent in net sales from last year. The company focuses more on sales from physical locations rather than online stores. But, with its current position, it has the ability to increase online sales since Gap spends in average more than its competitors in online marketing. Currently, it is its second most profitable segment after Old Navy. Even though Gap stores are located in eighteen countries, there is not a lot of diversity, since most of the stores are mainly located in the United States. Being centralized in the United States, Gap is more vulnerable to changes in the U.S. market. So, a suggestion to have a more stable performance is to become more globally decentralized. One reason that Gap is not performing as well as expected is because it has somewhat lost its brand identity. In the past years, Gap shelves have displayed different kinds of clothing from classic casual to trendy to professional too many times, causing consumers to wonder what the brand even stands for. The other brands of Gap, Inc. are also playing a role in destroying the

Gap Inc. 9 Gaps core offering and leaving with little room to maneuver. During the last decade, Gap was considered to be a great example for other brands to look at. Cool and understated, the brand defined hip, with great TV ads directed by directors du jour such as Spike Jonze, complete with catchy soundtracks from on-the-rise bands such as French duo Daft Punk. Hipster Hollywood types infused the brand with a sense of down-home cool until, well, the wheel turned, Gap didn't evolve, and suddenly it just didn't feel quite so hip any more. (Walters, 2007) In conclusion, with its history back at the beginning of Gap, Inc., Gap stores today make up one of the four segments of the company. Located in several countries throughout the currently, Gap stores consist of more than half of the Gap, Inc. stores by offering a large variety of casual apparel. Currently, net sales provided by Gap stores make up 39 percent of the total portfolio of Gap, Inc., and it is the second major segment in company. Due to several reasons, Gap is not performing as well as it is expected, which has led the net sales to decline by 4 percent. So, right now Gap needs to improve certain aspects of its marketing strategy in order to regain the reputation that it had a decade ago.

Gap Inc. 10

Banana Republic
Kristina Daily

Gap Inc. 11 1969. Lyndon Baines Johnson left office as Richard Milhous Nixon was sworn in as the 37th President of the United States of America. The Beatles give their last public performance on the roof of Apple Records. Man took his first walk on the moon. And Doris and Don Fisher opened the first Gap store in San Francisco. Today, Gap Inc. is one of the world's largest specialty retailers, with more than 3,100 stores and fiscal 2007 revenues of $15.8 billion. In addition to the parent company Gap, Inc., Gap, Inc. also operates four of the most recognized apparel brands in the world Gap, Banana Republic, Old Navy and Piperlime, each with their individual target markets. Gap Inc. acquired Banana Republic in 1983, and initially the brand only carried two stores and a safari motif. Today, Banana Republic has grown from its original two-store wannabe safari outfitter to an empire in its own right. Banana Republic is known for its casual luxury, with high-quality apparel. Banana Republic tailors its store to appeal to the unique market of pleasing the most fashion conscious consumers. Gap is known for turning classic clothing into must-have fashion. Since its founding in 1969, Gap has provided its customers with clothing and accessories that enhance their personal style. Banana Republic now offers sophisticated, fashionable collections of dress-casual and tailored apparel, shoes and accessories for men and women at higher price points than Gap. Banana Republic products range from apparel, including intimate apparel to personal care products. Banana Republic also operates Banana Republic Factory stores, which carry a similar line of products. Additionally, the well-known retailer of men's and women's mid-scale (not highdollar, but far from discount) casual and tailored apparel has a expansive territory of 535 stores in North American and Japan, and a Web site, through all of which it distributes its well-puttogether look. A division of ailing retail giant Gap Inc. since 1983, at one point it was dangerously close to cannibalizing its parent's customers. In several apparent contrasts to Gap, however, the company buys up historic landmarks and refurbishes them as opposed to breaking new ground and paving a fictional paradise. To differentiate their products, Gap, Inc. not only added additional stores such as Old Navy and Banana Republic, they added trendier clothing to try and please the younger generation. However, they tried too hard and had to eventually face not only failure but also loss of interest from their existing customers. In trying to salvage the company and its sales, Gap launched a

Gap Inc. 12 new back -to -basics campaign aimed at winning back the previous customers' trust. The back -to -basics campaign brought back the signature merchandise, as well as the original management and marketing ideas. Today Gap has regained some of its previous customers and plans to evolve from there. Banana Republic stores offer a shopper-friendly environment with an assortment of apparel and accessories that emphasize style, quality, and good value. The range of merchandise displayed in each store, however, depends on the selling season and the size and location of the store. Banana Republic stores are generally open seven days per week and most holidays. All sales are tendered for cash, checks, debit and credit cards, and the Banana Republic private label credit cards issued by a third party. The company also issues and redeems gift cards through the private brand. Banana Republics business follows a seasonal pattern, with the sales peaking over an estimated 13 weeks out of the year during the back-to-school/ work and holiday periods. The cyclical nature of the retail business requires Banana Republic to carry a significant amount of inventory, especially prior to the peak selling seasons. Inventory levels are reviewed in order to identify slow-moving merchandise within the company and items that are no longer in stock in a sufficient range of sizes and use markdowns to clear merchandise. Much of the inventory is maintained in the companys distribution centers. The global specialty apparel industry/ retail industry is highly competitive. Banana Republic competes with national and local department stores, specialty and discount store chains, independent retail stores and internet businesses that market similar lines of merchandise. Also competition arises in the European, Japanese, and Canadian markets from established regional and national chains. Banana Republics ability to develop and evolve their individual brand is vital to its success. Their distinct brand is among one of their most important assets. All aspects of the brand development from product design and distribution to marketing, merchandising, and shopping environments are controlled by their parent company, Gap, Inc. Gap, Inc. describes its individual brands as having a simple and common purpose. To make it easy for people to express their personal style. We constantly evolve each brand to better meet our customers needs through innovative and inspiring design; through convenient and engaging store experiences; and by communicating with people in a way that connects to how

Gap Inc. 13 they live, work and play. Banana Republic acts as Gap, Inc.s accessible luxury brand, offering high-quality apparel and accessories collections for men and women. Social responsibility is fundamental to Gap, Inc. and how they operate as a company. Gap Inc. believes that they should go beyond the basics of ethical business practices and embrace our responsibility to people and to the planet. By doing this, they believe this brings sustained, collective value to shareholders, employees, customers and society. Dan Henkle, SVP, Social Responsibility of Gap, Inc., describes Gaps ethical practices in a nutshell through his statement that, acting in an ethical way is not only the right thing to do it also unlocks new ways for us to do business better. Banana Republic contributes significantly to Gap, Inc.s larger portfolio. In 2007, Banana Republics net sales (in millions) were $2,548 when compared to Gap, Inc.s being $15,943, which equals to about 15.98% of the company as a whole. Overall, the global sales growth of Banana Republic from the previous year was 11%. In addition, as per Gap, Inc.s 2007 Annual Report, Banana Republic acquired $2,351 (in millions) in net sales, $136 in direct online sales, $147 in Canada, and $89 in Asia, totaling $2,723 in total net sales which contributes about 17% of the Gap, Inc. as a whole. Delivering elevated design and luxurious fabrications at approachable prices, Banana Republic has been credited with helping make fashion more accessible. The brand offers elevated essentials and sophisticated seasonal collections of accessories, shoes, personal care products and intimate apparel. From work to casual occasions, Banana Republic offers covetable, uncomplicated style.

Gap Inc. 14

OLD NAVY
Sony Byanjankar

Gap Inc. 15 Old Navy, a low-priced retailer and a subsidiary of Gap Inc., was founded by a Bronx native, Millard Drexler in 1994. The company converted some of its Gap outlets into the new format, which initially operated under the banner "Gap Warehouse. But after it was proved to be highly successful, Drexler and other executive decided to give it its own identity. In 1994, when the founder of Gap Inc. and CEO of the company were visiting Paris, they came across a bar named Old Navy which led them to change Gap Warehouse to Old Navy. The first three Old Navy stores were opened in Colma, San Leandro, and Pittsburg in Northern California. The reason behind the opening of Old Navy was to compete with the low-priced retailer stores like Target, Wal-Mart, JC Penny and others. Before the opening of Old Navy, Drexler and his advisory groups surveyed if Gap could produce the markdown version of itself. The company contacted many overseas garment factories and asked them if they could produce a lower-priced line using less expensive fabrics. After a long discussion and research, they came up with the idea of Gap Warehouse. The idea of opening the cheaper version of Gap was an immediate success for the company. Within the first year of its opening, Old Navy was able to open 57 more stores within the country generating $120 million in sales. By the end of 1995, the company had 131 stores opened with $420 million in sales. In 1997, it became the first retail brand to reach $1 billion in sales in less than 4 years. By the end of the year, the company has 282 stores and $1.3 billions in sales, which represented nearly 20% of the Gap Inc. total revenue. More than 100 stores were opened each year in 1998 and 1999, and by the end of a decade, the company had total of 513 stores opened. The largest Old Navy stores are its flagship stores, located in New York City, the Mall of America, Seattle, Chicago, and San Francisco[In 2001, Old Navy made its debut in international market. It opened

Gap Inc. 16 12 stores in the Greater Toronto Area, Canada and 7 stores in the province of Quebec in 2004. By the end of 2007, Old Navy has more than 1,000 stores in the united stated and Canada. Old Navy started its online store, oldnavy.com in 2000. At oldnavy.com, there is a $5 shipping charge no matter how much you purchase. But now a days it is promoting free shipping for any order of $50 or more. Old Navys target market largely consists of fashion oriented as well as price conscious teenagers and adults. Old Navys stores have a specialized section of infants, boys, girls, men, and women clothing. Also, variety of accessories including shoes, handbags, toys, hats, sunglasses, and line of clothing and toys for dogs. Flagship stores, which are the largest Old Navy stores, have a collection of business clothes for women, plus size, and maternity section. But in 2007, plus-size clothing has been removed from all stores and made it available exclusively online, which boosted its online sales. Old Navy also attempted to start a bath and body line, called ONbody (Obsessively Natural), in association with New York based company Kiss My Face. But it could not do really well and dropped the effort after only a few months. In September 2007, Old Navy offers Old Navy Visa cards which can be used anywhere. People get 5% cash back on purchases at any Gap, Inc., store and 1% cash back on all other purchases. Old Navy represented the driving force behind Gap Inc. during the late 1990s. More than 100 stores were opened each year in 1998 and 1999, giving the company a total of 513 stores by the decade's end. In April 1999, Jenny Ming was appointed as a president of the Old Navy. She was not a newcomer in the company. She was the one who made the calls to overseas garment factories to determine whether a less expensive line of clothing could be made. Under Ming's leadership, Old Navy continued to expand, and its success played an increasingly important role in the health of the Gap Inc. Old Navy accounted for 16 percent of the total number of stores

Gap Inc. 17 operated by its parent company, but accounted for nearly 30 percent of its sales volume, which placed a huge pressure on Ming. To strengthen Old Navy's position as the Gap Inc.s growth force, Ming intended to expand aggressively, relying on her ability to predict emerging apparel styles. Ming's leadership began strongly but then it started to weaken, resulting in Old Navy's first setback. In 2000, the extensive retailer began recording declining sales. By October 2000, the company had posted five consecutive months of decline sales. Its stock value also dropped by 57 percent and in 2001 the company bear a loss of $ 7.7 millions. Old Navy, which used to be lifeblood of the Gap Inc., could not offer much help. Despite the negligible expansion achieved in the years leading up to its tenth anniversary, Old Navy represented a powerful retailing force. Only after a decade, Old navy accounted approximately 40 percent of the Gap Inc.s nearly $16 billion in revenue, which made Old Navy extremely important to its parent company. Hence, ever since its opening in 1994, Old Navy has proved itself as a worthy member of the portfolio. Currently, it is one of the most successful retailers in the history. With annual sales increasing with large margin, Old Navy signals towards need for discount retail stores. Old Navy maintains the quality of Gap, Inc. but serves at a lower price. This has provided the company with satisfied customers and bright future.

Gap Inc. 18

Piperlime
Maureen Atieno

Gap Inc. 19 Piperlime Shoe Company which is a part of Gap inc. was started in October 2006 with the site being officially launched in November, 2006.It is the only online store and it sells only shoes that are not affiliated with the Gap brand. It only sells single merchandise that is shoes. The reason as to why Gap Inc. started the online shoe store is because they found out that most of their online shoppers wore shoes from other brands instead of the Gap brands. Gap inc. found that it was less risky for them to start Piperlime since they would benefit from the success of its ecommerce and the growth of its online shoe sale. So they decided to open an online shoe store that sold shoes with that are designed, manufactured and branded by other companies. The brand name was randomly created and they chose the words they liked in order to come up with the name Piperlime. On the website green is the main color and the shoe blurbs are called fresh juice and the brand logo is a slice of citrus fruit.Piperlime represents 100 brands of shoes in their online store compared to other online stores like Zappos which offer a wide range of brands. The online store has shoes for women which are the majority followed by men and then kids who have less than two dozen brands. The shoes are high end and few shoes are under $300 with others costing up to $1000. Piperlime is an accessible luxury brand like starbucks and that one can fine shoes that are affordable compared to other online stores like Zappos. It offers distinctive shoe selection and offers tips on the latest footwear trends and styles by celebrity stylists.Piperlime sells only shoes while Zappos sells other apparels including eyewear, bags and watches. It differs from other online shoe stores like Zappos and Nordstrom because they provide an edited selection of designer and casual brands rather than any style a given shoe maker offers. This enables them to get shoes that they customers actually want and they are able to dress their customers from head to toe. Compared to other companies it offers a prepaid return and no postage on returning shoes

Gap Inc. 20 that do not fit. With the growing of the online shoe sales annually by 15 percent and will be $5.5 billion in 2010 Piperlime has a capability of growing and earning more revenue. The online sales in the second quarter of 2006 were up 27 percent from the previous year due to the new site. To keep its operations efficient Piperlime has a dedicated distribution center in Grove City, Ohio. It is headed by the senior vice president of Gap inc. and many of the people working in the company are Gap veterans and some are well known buyers from their competitors. It has an impressive group of merchandisers, and has attracted good resources from the supply chain thus making it more efficient .The companys culture is based on the idea of making it easy for people to express their personal style and doing business in a socially responsible way. They make emotional connections with customers all over the world inspiring product design, unique store experiences and compelling marketing. The key values that guide their success include integrity, open-mindedness, quality and balance. The company believes in caring for the environment by reducing energy usage and reducing waste to the environment and exploring the use of sustainable materials and products. They are also focused in improving the factory conditions through comprehensive monitoring and labor-standards program. Caring for the community by focusing on undeserved youth by providing grants, donations, community outreach and employee volunteer programs. They are also dedicated in supporting their employees by creating an environment where the rights, needs and unique contributions of every employee are respected. The companys code of ethics which is intended to promote and ensure an ethical and responsible work environment for the employees and the directors. The employees are responsible for abiding by the Gap policies and all national and local laws in all countries that the company does business. It is the responsibility for the employees to raise questions, make

Gap Inc. 21 appropriate disclosures and bring potential problems to the companys attention. The employees are also expected to report any code violations. It is against the companys policy for anyone to any action against any employee or a director, vendor or agent of the company for lawfully providing information assisting in an investigation of activities which he or she believes violates applicable law or for providing truthful information to the government, a government agency or law enforcement officers. All business decisions should be made solely for the benefit of the company and not for personal benefit. Employees should never give or accept anything that is of value from anyone and they should not solicit invitations or gifts from any third party. There is confidentiality of personal and company information. There ought to be accuracy of information and product integrity. The companys strength is their ability of focusing on just one product hence making it easy for them to study their customers and providing them with what they want. There small concentration of brands enables them to have an effective way of having customer loyalty with the particular brands. Their other strength is that the have an effective supply chain operation. They also have celebrity stylists who offer tips on the new fashion trends hence making them flexible to the new fashion trends. Based on Gap inc. stability and establishment and the other GAP brands, Piperlime is attracting existing customers and new customers. It is able to attract customers with different lifestyles since it provides casual shoes and also high fashion shoes. Even though some of their shoes are expensive, customers are also able to get affordable shoes. Their major strength is that they are customer focused compared to other online stores.

Gap Inc. 22

Managerial Analysis
SWOT Analysis SWOT analysis stands for examination of Strength, Weakness, Opportunities, and Threats of a company. This is an extremely powerful took to understand the current standing of a company and to predict the companys future perspectives. Strength Gap, Inc. has had a long history of almost 40 years now. It is an established name and is distinct in its sector of market. An in-depth of Gaps brand strength is later discussed in this section. The other distinct strength that Gap has is its global approach. Since, it is a multinational company; it is recognized all over the world. Meanwhile, being a multinational company has helped Gap, Inc. to diversity its intra-country market risks. Gap also invests large sum of money in research and development. This has given the company regular boost to move forward. Gaps unique way of ready made goods from different countries including Honduras, India, Bangladesh, and others has helped the company to reduce the labor costs. Meanwhile, it is interesting to look at a historical trend that the company has been able to sustain such a large supply chain and still been able to maintain enough inventories in the stock. Weakness Although Gap has excelled in its sector of apparels, it has some weaknesses that it needs to address. The companys narrow niche is one of the major weaknesses. It is limited in sales and growth. This has also increased the risks associated with the market. Even a minor competition from another clothing retailer can hamper the companys over all growth. In addition, Gap does not have a distinct name in certain sectors like Nike or Reebok have in sporting goods.

Gap Inc. 23 Furthermore, as illustrated by BusinessWeek, Gap has not been able to maintain a fashion identity. Opportunities After excelling in an industry, Gap can now increase its span of business in different industry sectors. For example, it has already started a online shoe store which is increasing in popularity. As stated earlier, since Gap is a recognized name, which will immensely help the company to establish its name in most of the other sectors. Threats Many competitors are arising in retailing industry everyday. These are some of the possible threats for Gaps operation. For example, the gradual increment in Limited Brands operations can hamper the companys growth. In addition, possible tariffs from government over the imported materials, or minor disturbance in the long supply chain of the company are a risk. The increasing cost of labor in other countries and decline in value of US Dollars everyday can compel the company to change its way of operation. Five Forces Analysis Competition Clothing retailing industry is highly competitive industry. There are many retailers in the industry who fight with each other to improve their customer base; Gap, Inc. is not an exception to this. Since its establishment in 1969, Gap has excelled in the sector. Nevertheless, to stay in the competition, it acquired Banana Republic in 1983. This helped the company to stay in the business as a major retailer in businesswomen clothing. Another major step came out when Gap opened Old Navy stores in 1994 to compete with the existing discount retailers including Target and Sears. The other competitors of Gap itself are Abercrombie, American Eagle, and others.

Gap Inc. 24 Hence, this industry is extremely competitive and the companies should be up to date with fashion and customer satisfaction. Ease of Entry Although it is not hard to enter the clothing retail business, it is hard to establish a distinct brand name. There is a low cost of entry in the market and there is no need of high research and development costs. Substitutes There are many substitutes in casual clothing industry. Since there are a wide variety of products that people can choose, they could either be substituted by sporting products, business apparels, cheap clothing materials, and others. Strength of Suppliers In retailing industry, the power of suppliers varies depending on the company itself. As per Gap, Inc., the suppliers have limited power. The annual report states that no suppliers supply more than 3% of the companys demand. This gives Gap, Inc. power to set the price of its raw materials. Strength of Buyers The buyers have variety of choices to make in the retail clothing industry. Since there are various competitors and substitutes in the company, the buyers might move shopping around. Hence, the companies have to work harder to retain the clients. Distinctive Notion According to a report issued by BusinessWeek, Gap holds 52nd position in top 100 brand names all over the world in 2006. In 2005 it was ranked in 40 th position. Its brand value in 2006 was $ 6,416 and in 2005 was $ 8,195 million. Having a long history of almost 40 years, it has

Gap Inc. 25 established a sense of closeness in the customers. This is one of the major reasons for Gap being rated one of the highest retention rates among customers. Banana Republic is yet another distinctive feature of Gap, Inc. It offers sophisticated and fashionable collections and is more expensive than Gap. It specially appeals to mid-age busy women. Nevertheless, it is also popular among men. Old Navy is another specialty store under the portfolio of Gap, Inc. Established in 1994; Old Navy is distinct as the discount retailer. It is less expensive than Gap clothes and is probably the most popular brand in the portfolio. The other members of Gap portfolio are also getting to get distinct in their respective areas.

Financial and Economic Analysis


The consolidated financial statement comparison shows that Gap, Inc. is financially and economically sound. Although the company faced a decrement in net income between 2006 and 2007, the last two years have shown that Gap, Inc. is progressing. Currently, Gap is worth $13.65 billions where the industry average is only $488.12 millions. It has revenue of $ 15.76 billion (2008) where as the industry revenue is only $1.41 billions. Another important indicator, Earnings per Share is $1.05 of Gap compared to $0.95 of the industry average. Ratio Analysis The data used here with are from 2007 Annual Report. Please refer to Appendix 1 for more details. Solvency Ratio Liquidity Ratio The data analysis of solvency ratios shows that the company has a quick ratio of 1.42 and a current ratio of 2.21. The current ratio shows that the company can still invest some of its cash. Leverage Ratio

Gap Inc. 26 The ratio between debt and net worth was 0.44 and that between debt and inventories was 1.27. This shows that company is in a good share regarding the capacity payment of debts. Profitability Ratio Return on sales was 0.05 and that of assets was 0.09. This shows that the company still has a lot of room to grow. This profitability ratio does not seem too strong. Stock and Market Trend Analysis Gap has been able to meet the investors expectation most of the times since its incorporation. It has been paying out regular dividends and the stock trend shows that the companys value has been volatile. During the .com boom of 1998 and 1999, the stock reached as high as $68 but with the problems in stock market, it went down. More recently, although the company has been able to buffer the real estate and credit crunch, it has not been able to grow properly. But as per the analysts, the companys ability to buffer the so called recession is a sign of companys stability.

Social Issues
Gap, Inc. gives high value to social responsibilities. It says, At Gap, Inc., social responsibility is fundamental to who we are and how we operate as a company. According to the Gap, Inc. official website, they divide the social issues in to different sectors including environmental, employees, communities, and others. The also have designed a separate social responsibility report which is published every year. For the reduction of pollution and increment of labor-standards, they conduct a factory-monitoring program, which thoroughly examines the factory and working conditions. In addition, the company is constantly working towards reduction of energy consumption and minimum use of materials that hamper the environment. They work with environmental consultancy called CH2M Hill to examine the environmental

Gap Inc. 27 challenges. The environmental challenges include conservation of energy, reduction of waste, sustainable design, and supply chain optimization. Gap, Inc. is active in investment for the community. Bobbi Silten, the Chief Foundation Officer of Gap foundation says, We believe there a promise that exists in all of us, and its not just in the people we serve-its in ourselves. The company first determined the target causes and invests (donates) time and money for the betterment of the cause. Betterment of the employees, conservation of environment where the company operates, equal employment opportunities, fair accounting practices, and many others are some of the other social issues that the company analyses with high priority. Gap, Inc. received 100% score in Human Rights Campaigns Corporate Equality Index.

Ethical Issues
As the corporate world is greatly hampered by ethical issues today, Gap, Inc. has always taken active steps to be of the safe sides. Enron, Tyco, and WorldCom scandals brought about new regulations and Gap, Inc. has always been on top of that. Gap, Inc. considers itself as equal opportunity employer and maintains a 24/7 hotline to complain against fraud as well as discriminative behaviors.

Portfolio: Strategic Analysis


Gap claims that its different brands have common purpose of making it easy for people to express their personal styles. Although these brand names are distinctive in themselves, they do not work as autonomous business. All these brands share the value with the corporation. Quite often these companies in the portfolio share the warehouses, and other resources. They share the common principles of ethics, mission statement, and client services. The supply chain and ways of operation is almost the same for these companies.

Gap Inc. 28 When Gap, Inc. starts a new business, they buy existing struggling company like Banana Republic or they start a new segment themselves. For example, Banana Republic was an existing company, which grew with the resources that Gap had. Old Navy was a new concept that Gap started. It used to be called Gap Warehouse, but was later renamed Old Navy. Meanwhile, the other brands have their own ways of existence. For example, Piperlime is a online store that only sells about 100 different brands of shoes. With all these different brands, Gap has been able to hold significant power in whole apparel industry. But it seems like the company can diversify itself to other industries. As there are more and more companies entering this industry, Gap is losing its share of the market. It should not aggressively start different sectors but rather start one industry at a time. It also should be able to use the brand name to gain customer loyalty.

Conclusion
Established in 1969 as a small retailer of jeans, Gap has been able to surpass various hurdles to reach todays designation of top US apparel retailer. It is an expert in the clothing retailer industry with different brands maintaining their effects in different niche market. For example, Old Navy covers price conscious shoppers and Banana Republic is an attraction for people who would pay a higher price for more sophisticated dress. Having faced so many different hurdles, Gap has proved its worthiness. But current problems in cash flow shows need for the companys change in marketing, management, or financial strategies. Since it is an established name, if strong plans are traced out, the company should be able to maintain its superiority in retail industry.

Gap Inc. 29

References
Gap Inc. (2008). Social Responsibility. Retrieved April 22, 2008 from Web site: http://www.gapinc.com/public/SocialResponsibility/socialres.shtml Gap Inc. (2008). About Gap Inc.. Retrieved April 21, 2008 from Web site: http://www.gapinc.com/public/About/about.shtml Commodity Systems, Inc. (CSI) & Hemscott Americas (2008). Gap Inc.. Retrieved April 21, 2008 from , Web site: http://finance.yahoo.com/q?s=gps Gentleman, A (2007, November 16). Gap Campaigns Against Child Labor . Retrieved April 19, 2008 from New York Times, Web site: http://www.nytimes.com/2007/11/16/business/worldbusiness/16gap.html?_r=1&oref=slogin New York Times (2008, April 21). The Gap Inc.. Retrieved April 21, 2008 from Web site: http://topics.nytimes.com/top/news/business/companies/gap_the_inc/index.html Wikimedia Foundation, Inc. (2008, April 20). Gap. Retrieved April 19, 2008 from Wikipedia, Web site: http://en.wikipedia.org/wiki/Gap_Inc McKeough, T. (2008, March). DESIGNS ON SUCCESS. Fast Company, Retrieved April 24, 2008, from Business Source Premier database. McKeough, T. (2008, March). DESIGNS ON SUCCESS. Fast Company, Retrieved April 24, 2008, from Business Source Premier database. Securities and Exchange Comission (2008). . Retrieved April 19, 2008 from EDGAR Web site: http://www.sec.gov/Archives/edgar/data/39911/000119312508069025/d10k.htm#tx36443_2

Gap Inc. 30

9-cell Matrix

Appendix
Appendix 1. Gap, Inc.s Assessment of Competitive Strengths Competitive Strength Measure Rating of Companys Strength

Relative Market Share- A business units 2.2. relative market share is defined as the ratio of its market share to the market share held by the largest firm in the industry, with the market share measured in unit volume, not dollars. Cost Relative to Competitors Cost- 4 Business units that have low costs relative to key competitors costs tend to be more strongly positioned in their industries than

Gap Inc. 31 business units struggling to maintain cost parity with major rivals. Ability to Match or Beat Rivals on Key 8.5 Product Attributes-A companys competitiveness depends in part on being able to satisfy buyer expectations with regard to features, product performance, reliability, service, and other important attributes. Ability to Benefit from Strategic Fits 7 with Sister Businesses- Strategic fits with other businesses within the company enhance a business units competitive strength and may provide a competitive edge. Bargaining Leverage with Key Suppliers 8 or Customers- Having bargaining leverage signals competitive strength and can be a source of competitive advantage. Caliber of Strategic Alliances and 7.5 Collaborative Partnerships with Suppliers/Buyers-Well-functioning alliances and partnerships may signal a potential competitive advantage and thus add to a businesss competitive strength. Brand Image and Reputation- A strong 9 brand name is a valuable competitive asset. Competitively Valuable Capabilities- N/A Business units recognized for their technological leadership, product innovation, or marketing process are usually strong competitors in their industry. Profitability Relative to CompetitorsBusiness units that consistently earn above-average returns on investment and have bigger profit margins than their rivals usually have strong competitive positions. 3.5

Gap Inc. 32 Appendix 2 :Financial Statements Income Statement View: Annual Data | Quarterly Data All numbers in thousands

Gap Inc. 33 PERIOD ENDING Total Revenue Cost of Revenue Gross Profit Operating Expenses Research Development Selling General and Administrative Non Recurring Others Total Operating Expenses 2-Feb-08 3-Nov-07 4-Aug-07 5-May-07 4,675,000 3,854,000 3,676,000 3,558,000 3,049,000 2,407,000 2,411,000 2,204,000 1,626,000 1,447,000 1,265,000 1,354,000

1,208,000 -

1,079,000 -

996,000 -

1,094,000 -

Operating Income or Loss Income from Continuing Operations Total Other Income/Expenses Net Earnings Before Interest And Taxes Interest Expense Income Before Tax Income Tax Expense Minority Interest Net Income From Continuing Ops Non-recurring Events Discontinued Operations Extraordinary Items Effect Of Accounting Changes Other Items

418,000

368,000

269,000

260,000

20,000 438,000 5,000 433,000 168,000 265,000

28,000 396,000 1,000 395,000 156,000 239,000

36,000 305,000 10,000 295,000 110,000 185,000

33,000 293,000 10,000 283,000 105,000 178,000

(2,000) -

(32,000) -

Net Income Preferred Stock And Other Adjustments

265,000 -

237,000 $237,000

153,000 $153,000

178,000 $178,000

Net Income Applicable To Common Shares $265,000

Gap Inc. 34

Cash Flow View: Annual Data | Quarterly Data PERIOD ENDING Net Income

All numbers in thousands 2-Feb-08 3-Feb-07 28-Jan-06 833,000 778,000 1,113,000

Operating Activities, Cash Flows Provided By or Used In Depreciation 547,000 Adjustments To Net Income 56,000 Changes In Accounts Receivables Changes In Liabilities 375,000 Changes In Inventories 252,000 Changes In Other Operating Activities 18,000 Total Cash Flow From Operating Activities 2,081,000

530,000 26,000 1,000 (97,000) 12,000 1,250,000

625,000 (74,000) (123,000) 114,000 (104,000) 1,551,000

Investing Activities, Cash Flows Provided By or Used In Capital Expenditures (682,000) Investments 393,000 Other Cashflows from Investing Activities 15,000 Total Cash Flows From Investing Activities (274,000)

(572,000) 381,000 41,000 (150,000)

(600,000) (123,000) 1,009,000 286,000

Financing Activities, Cash Flows Provided By or Used In Dividends Paid (252,000) Sale Purchase of Stock (1,575,000) Net Borrowings (326,000) Other Cash Flows from Financing Activities 7,000 Total Cash Flows From Financing Activities Effect Of Exchange Rate Changes Change In Cash and Cash Equivalents

(265,000) (860,000) 23,000

(179,000) (1,861,000) (2,040,000) (7,000) ($210,000)

(2,146,000) (1,102,000) 33,000 (3,000) ($306,000) ($5,000)

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