Gap Inc wacc

Group members:
Jahangir hayat khan 11108007
Muzammil rana 11108009
Submitted to: SIR SALMAN ANWAR

Vision and Mission

Gap has no formal vision or mission, but the company does have philosophy and ethics
statement.
Vision (Developed)
Gap Inc.s vision is to be the first choice in family retail clothing while maximizing customer
satisfaction and shareholder value.
Our vision for how we work is built on four pillars:
Think: customers first we consider the needs and value the diversity of thought, experience and
perspectives among our customers.
Inspire: creativity we open ourselves to new ideas, tapping into our diversity of perspectives.
Do: whats right we treat every customer, supplier and employee with respect.
Deliver: results we strive to create an inclusive environment where employees thrive and
generate top performance.
Mission (Developed)
We create emotional connections with customers around the world through inspiring product
design, unique store experiences, and compelling marketing to make it easier for you to express
your personal style throughout your life.
Mission is build on following pallors:
Gap, Inc. is a brand-builder. We create emotional connections with customers (1) around the
world (3) through inspiring product design, unique store and renowned ecommerce experiences
(4), and compelling marketing. Our purpose simply to be a leader in the specialty family clothing
(2) industry to make it easy for you to express your personal style throughout your life (7). We
have more than 150,000 passionate, talented people around the world who help bring this
purpose to life for our customers (9), leading us to achieve a major competitive advantage.
Across our company and embedded in our culture are key values that guide our success and

continued growth (5): integrity, respect, open-mindedness, quality and balance (6). Every day, we
honor these values and exemplify our belief in doing business in a socially responsible way .

Goals & Objectives:

Moving beyond 2011, the company remains focused on growing revenue, operating margin and
earnings while returning excess cash to shareholders. The company has an overall goal of low
single digit revenue growth on its approximately $15 billion revenue base. In North America,
sales are expected to grow modestly on its smaller, healthier specialty store fleet supplemented
by sales growth in its online and outlet channels. Internationally, the company plans to
complement specialty store growth with the higher returning online, outlet and franchise
channels. Regarding margins, the company intends, over time, to return to the operating margin
levels achieved in 2010. These are expected to be enabled by merchandise margin re-expansion
resulting from anticipated normalized cotton prices, especially beginning in the back half of
2012.
Current Strategies:
A. Corporate Strategy
1.

Diversified brands give Gap an edge: Old Navys value-priced products enable The Gap, Inc to
strive during economic downturn. Banana Republics fashionable products offer customers more
variety during economic growth.

2.

Booming International Expansion: Its unprecedented growth is a direct result of meeting a

niche in the clothing market, at a time when The Gap was well positioned to meet the new
demands of this "business-casual" trend, introducing other chains to expand its customer base,
and aggressive expansion in the global marketplace.
Today, Gap, inc. is recognized as one of the world's largest specialty retailers. It. operates four of
the most well known clothing brands on the planet: Gap, banana republic, Old Navy, and Forth
& Towne.

3.

Outsourcing: to utilize modern infrastructure and focus on their core strengths while other
professional firms handle their other business processes. The textile industry has been a

fundamental driving force in Chinas economy for many years. Outsourcing production to the
Chinese manufacturers has become popular among other foreign firms in the recent past. This is
especially because the textile industry is a labor intensive industry and firms prefer to outsource
4.

in China since it has large pool of cheap labor.

The GAP Inc. launched its e-commerce platform, Universality, in 2008, which enables
consumers to navigate with ease through each of the companys five brands. This service focuses
on improving the speed and user-friendliness of The Gap, Inc.s websites, and has recently
expanded the service to 18 additional European countries. The Gap, Inc. now offers products to
customers in 90 countries, an increase from 25 countries since the beginning of 2010. One

5.

consumer trend that continues to gain momentum is

Conveniencecustomers want it now. They continued to make investments to expand our
online and outlet presence so more people can participate with their brands.

6.

Focusing on Customer, the Gap, Inc. recognizes the importance of its customers opinion. The
company indicated trends pointing toward value maximization, and now offers Gap Outlet and
Banana Republic Factory Stores to satisfy demand for value. The company created a store model
that boasts bright colors, interactive options, and bold marketing ideas to create an enjoyable and
exciting shopping experience for the whole family. The company has also identified the
importance of the womans role in shopping for the whole family, and focuses their marketing
tactics on them with hopes of increasing market share. Furthermore, in March 2010, Gap was
recognized by the Ethisphere Institute as one of the Worlds Most Ethical Companies, for the
fourth consecutive year

Swot:
Opportunities
1.
2.
3.
4.

Research and development of new and appealing products.

Global new market in Europe and Asia
Penetration of e-commerce
Developing and training of personnel

WEAKNESSES

1.
2.
3.
4.
5.

Nearly all merchandise depends on third-party vendors, which is outside of the US.
Huge store base including unaffiliated franchisees
Less attractive in trendy clothing
Uncontrollable production processes
Low numbers of stores in Asia

STRENGTHS
1.
2.
3.
4.
5.

Global brand recognition

Stores located in worldwide
Franchising system easily to expand Gap store internationally
Multiple brands and brand extensions for a wide range of segments
Huge customer and vendor base

Threats
1.
2.
3.
4.
5.

Economic downturn directly affects apparel retail business.

Global specialty apparel retail industry is highly competitive
Emerging fast fashion retailers
The market for prime real estate is competitive
Newly emerging Asian brands

Competitive Profile Matrix (CPM)

CRITICAL

TJX Companies

Abercrombie & Fitch

SUCCESS
FACTORS

GAP Inc.

Co.
Weig

Ratin

Weighted

Weig

Ratin

Weighted

Weig

Ratin

Weig

ht

Score

ht

Score

ht

hted
Score

Customer Loyalty

0.15

0.45

0.15

0.45

.15

0.45

Financial Position

0.1

0.4

0.05

0.1

0.1

0.3

Market Share

0.1

0.3

0.05

0.15

0.05

0.15

Management

0.1

0.4

0.15

0.45

0.1

0.3

Global Expansion

0.1

0.4

0.1

0.3

0.1

0.4

0.15

0.45

0.15

0.3

0.10

0.3

0.05

0.15

0.05

0.2

0.10

0.4

0.1

0.2

.20

0.8

0.20

0.8

Advertising

0.05

0.15

0.05

0.2

0.05

0.15

Technology

0.15

0.3

.05

0.1

.05

0.1

TOTAL

1.00

3.2

1.00

3.05

1.00

International
Branches
Employees
Family-Oriented
Image

3.35

Based on the CPM matrix, Gap Inc., obtained a weighted score of 3.35, while TJX Companies
obtained a weighted score of 3.2 and Abercrombie and FItch obtained a weighted score of 3.05.
Even if Gap Inc. has the highest weighted score, some of its factors have a varied score in rating
and weight.
Gap Inc. should prioritize competitive advantage and make additional improvements with factors
that have low on rating allocating improvements with its technology and additional
advertisements. The company should also focus on its Global Expansion in Asia since they had a

goods trade deficit of approximately $62.1 billion as of March 2011 as well as investments in
order to catch up in the future. This advantage can improve its management, customer service,
financial position, number of branches, customer loyalty and security and safety and
international relation. Lastly, the company should maintain its Family-oriented apparel image
since they share a very big market share with that sector.

External Factor Evaluation (EFE) Matrix

KEY EXTERNAL FACTORS

Weight

Rating

Weighted
Score

Opportunities
Green/Organic materials for clothes

0.06

Research and development of new and appealing 0.17

products.
Global new market in Europe and Asia

0.18

0.54

Penetration of e-commerce

0.08

0.28

Developing and training of personnel

0.06

0.12

Economic downturn directly affects apparel retail 0.11

0.24
0.51

Threats
business.
Global specialty apparel retail industry is highly 0.07

0.33
2

competitive
Emerging fast fashion retailers

0.06

0.12

The market for prime real estate is competitive

0.07

0.14

Newly emerging Asian brands

0.14

TOTAL

1.00

0.32
3.12

0.14

According to the EFE Matrix of Gap, Inc., it scored 3.12. EFE Matrix based on the
evaluation of general environment analysis of these external factors that affect the business to get
the potential opportunities and threats for Gap, Inc. The weighted score indicates that the

companys response had a huge effect in its existing Opportunities and Threats in the Apparel
Retail industry.
In the table, we can see that the densest factor is Global new market in Europe and Asia; it
evaluated in a weight the average of 0.54. Europeans had been a good market for clothing since
then. Asian countries on the other hand are becoming a good possible market for clothes
nowadays since they are becoming aware of the global brands with affordable prices. As a
Filipino, I think that it will be a hit if they will increase the numbers of branches here in the
Philippines.
EFE Matrix above has its current competitive position or business strength in the industry is
above average. This factors had been coping up well, which can be positively or adversely affect
its financial positioning today.

Internal Factor Evaluation Matrix

KEY INTERNAL FACTORS

Weight

Rating

Weighted
Score

STRENGTHS
Global brand recognition

0.11

Stores located in worldwide

0.17

0.13

0.08

0.06

Franchising

system easily to

expand

Gap

store

internationally
Multiple brands and brand extensions for a wide range of
segments
Huge customer and vendor base

0.44
0.68
0.26
0.16
0.12
0

WEAKNESSES
Nearly all merchandise depends on third-party vendors,

0
0.11

Huge store base including unaffiliated franchisees

0.06

Less attractive in trendy clothing

.07

0.14

Uncontrollable production processes

0.07

0.14

which is outside of the US.

0.22
0.06

Low numbers of stores in Asia

TOTAL

0.14
1.00

0.56
2.70

Based on the table shown above IFE Matrix, Gap Inc., scores about 2.70. It weighted based on
the companys higher than average rate and has a strong internal position. This reiterates the fact
that the company is strong in terms of branches inside and outside America. It had increased in
the number of foreign branches; positive value system of the employees, as well as the broad
distribution of local branches and Global Brand Recognition rated as 4 which had been evaluated
by the companys strengths. From the illustration table, it concludes that Gap, Inc. has a good
internal structure.

Swot matrix:
Opportunities
5. Research and development of new and
appealing products.
6. Global new market in Europe and Asia
7. Penetration of e-commerce
8. Developing and training of personnel

STRENGTHS

WEAKNESSES
6. Nearly all merchandise depends on
third-party vendors, which is outside of
the US.
7. Huge store base including unaffiliated
franchisees
8. Less attractive in trendy clothing
9. Uncontrollable production processes
10. Low numbers of stores in Asia
Threats

6. Global brand recognition

7. Stores located in worldwide
8. Franchising system easily to expand
Gap store internationally
9. Multiple brands and brand extensions
for a wide range of segments
10. Huge customer and vendor base

6. Economic downturn directly affects

apparel retail business.
7. Global specialty apparel retail industry
is highly competitive
8. Emerging fast fashion retailers
9. The market for prime real estate is
competitive
10. Newly emerging Asian brands

So strategies:
(S4, o3) company has a positive global reorganization so they should heavily invest in china to
burst their sales.
(s2, o2) stores are located worldwide they have a great opportunity to do research and explore
what people are looking forward.
Wo strategies:
(W1, o3) gap vendors are outside of United States so their cost of material supply is high they
should transfer the plant to that place where they can produce cheap.
W2, o2)
They have opportunity to do research on different segments in big stores to avoid
unaffiliatedness.
St Strategies:
(S5, t5) they have big vendor hub so they can easily target and serve to Asia.
S4, t2
Company has multiple brands and segments they can tackle up the competitiveness of global
trends.
Wt strategies:
W5, t5
Gap should increase the stores in Asia to tackle the newly emerging brands.
W4, t3
If Production process is controlled economic downturn can be controlled.

Space matrix:
Internal strategies

External strategies

Here company fall in the aggressive strategies:

Backward, forward, horizontal integration

Market penetration
Market development
Product development
Diversification

Bcg matrix:

High

Medium

1.0
High

.5

low
0.0

+20

Medium (growth)0.0

low

-20

Relative share
Industry sales growth rate id 18% while the market share of the company is 70% so
according to the results of Boston Consulting Group (BCG) Matrix, gap inc Company lies in
the second quadrant (star) of the matrix and it is the segment with high relative market share
and a high industry growth rate that represent organization have best long rum opportunities for
growth and profitability. Appropriate strategies of the star quadrant are as:

Forward, backward and horizontal integration.

Market Penetration.

Market Development.

Product Development.
In the essence, the company goes to the product, market development and market penetration

Internal external matrix (IE):

According
to

IE

matrix
gap

inc

Company
is

placed

in the first
three cells
which
suggest
that

the

organizati
on should
follow the
Grow &
Build strategy. In this case the tactical strategies should focus on the Market Penetration and
Product development.

Backward, Forward or Horizontal Integration.

Market Penetration.

Market Development.

Product Development.

Grand strategy matrix:

The plastic furniture industry growing rapidly and the demand of the plastic furniture is
increasing with the passage of time. According to the GRAND Matrix the gap inc Company
lies in the first quadrant which shows that the company has the strong competitive position in
the growing market. And the strategies of the first quadrant are as:

Market Development.

Product Development.

Market Penetration.

Backward Integration.

QSPM:
Strategic alternative

Product development Market penetration

KEY INTERNAL FACTORS

Weight

AS

TAS

AS

TAS

Global brand recognition

0.11

0.44

.33

Stores located in worldwide

0.17

0.13

0.08

0.06

STRENGTHS

Franchising system easily to expand Gap

store internationally
Multiple brands and brand extensions for a
wide range of segments
Huge customer and vendor base

0.68
0.26
0.16
0.12

4
2
3
1

.68
.26
.24
.06

0
WEAKNESSES
Nearly all merchandise depends on thirdparty vendors, which is outside of the US.
Huge store base including unaffiliated
franchisees
Less attractive in trendy clothing

0
0.11

0.06

.07

0.22
0.06
0.14

1
1
3

.11
.06
.21

Uncontrollable production processes

0.07

0.14

.28

Low numbers of stores in Asia

TOTAL

0.14

0.56
2.70

.56

1.00

2.79

Opportunities
Green/Organic materials for clothes

0.06

Research and development of new and 0.17

0.24

.24

.51

appealing products.
Global new market in Europe and Asia

0.51
0.18

0.54

.54

Penetration of e-commerce

0.08

0.28

.28

Developing and training of personnel

0.06

0.12

.12

Economic downturn directly affects apparel 0.11

.22

.14

.12

.14

.32

Threats
retail business.
Global specialty apparel retail industry is 0.07
highly competitive
Emerging fast fashion retailers

0.33
2
0.14

0.06

The market for prime real estate is 0.07

competitive
Newly emerging Asian brands

0.14

TOTAL

1.00

0.12
0.14

Grand total

0.32
3.12
5.82

2.63
5.42

Anticipated ratios for futures:

Currency in

As of: Jan 31

Jan 30

Jan 29

Jan 28

2011

2012

Year

Press

Tren

Millions of US

2009

2010

Dollars

Reclassifie

Reclassifie

Revenues

14,526.0

14,197.0

total revenues

14,526.0

14,197.0

cost of goods sold

9,079.0

gross profit

Release
14,664.

14,549.

14,664.

14,549.

8,473.0

8,775.0

9,275.0

5,447.0

5,724.0

5,889.0

5,274.0

3,892.0

3,922.0

3,912.0

3,836.0

depreciation & amortization, total

2.0

6.0

4.0

--

other operating expenses, total

3,894.0

3,928.0

3,916.0

3,836.0

operating income

1,553.0

1,796.0

1,973.0

1,438.0

interest expense

-1.0

-6.0

--

-69.0

interest and investment income

37.0

7.0

6.0

--

net interest expense

36.0

1.0

6.0

-69.0

currency exchange gains (loss)

--

32.0

3.0

--

--

1.0

8.0

--

ebt, excluding unusual items

1,589.0

1,830.0

1,990.0

1,369.0

other unusual items, total

-5.0

-14.0

-8.0

--

ebt, including unusual items

1,584.0

1,816.0

1,982.0

1,369.0

income tax expense

617.0

714.0

778.0

536.0

earnings from continuing operations

967.0

1,102.0

1,204.0

833.0

net income

967.0

1,102.0

1,204.0

833.0

selling general & admin expenses,

total

other non-operating income

(expenses)

net income to common including

extra items
net income to common excluding
extra items

967.0

1,102.0

1,204.0

833.0

967.0

1,102.0

1,204.0

833.0

DECISION AND RECOMMENDATION

A.

Corporate:
Objectives:
Increase number of stores by 5 % in next five years.
Increase sales per square foot by 6% over the next 3 years.
Increase same store sales by 10% over the next 3 years.
Mitigate increases in cost of materials.
Expand International sales in new and existing markets
Increase technology features to allow for a consumer friendly platform.
Strategies:
o

Aggressively pursue franchisees

The organization should actively seek the attention of potential individuals or groups who are
interested to own a franchise with any of the Gap product subsidiaries. Attractive franchisee
packages shall be drawn and presented with emphasis on the companys steady growth in market

share and product offerings.

o
Purchase cotton hedges to mitigate costs increases.
Gap, Inc. is a business that require significant quantities of cotton, thus in order to offset future
rising cost, it is wise for the company to engage in hedging into the cotton futures market. The
result of hedging guarantees a set and predictable amount despite aggressive fluctuations in
cotton prices.
o Develop aggressive customer rewards programs to encourage higher spending.
Customer reward programs appear to be very attractive amongst buyers these days. Numerous
companies in the retail industries are heavily engaged in such practices e.g. Kohls cash. Gap,
Inc.s sales growth can definitely use the added value of a customer rewards program; price

sensitive buyers will surely avail of such buying incentives in light of todays economic
landscape.
o Research high population countries to determine International feasibility
Countries with expanding population, growing national income, increasing industrialization are
most likely to be more receptive in spending money into brand name clothing products.
Research show that there is a thriving market for Gap, Inc. in Europe and Asia, thus the
organization should focus on increasing its market share in these areas.
o Review IT platform for better design qualities
Technology is constantly evolving; it is prudent for the organization to remain cutting-edge in
this aspect, especially with the growth of e-commerce. The IT platform should be designed to
support widely diverse market geography, and one that can easily adapt with varying regulations
from foreign markets.
B.

Business:
Objectives:
Generate higher product visibility to target market.
Develop a mobile promotional plan.
Develop online shopping avatar that allows the customer to try on outfits from the comforts of
their home.
Capitalize on peak shopping seasons by increasing sales with minimum overhead investment.
Strategies:
o Utilize social media by encouraging customers to like their products for a chance to win
promotional items.
Social media plays a large role in todays connected society; Gap, Inc. should utilize this
strategy to ensure higher product visibility to their target market.
o Build and maintain customer cell phone numbers to send instant promotions for store
events.
Cell phone users have grown exponentially worldwide; individuals carry cell phones as part of
their lifestyle. The strategy of sending instant messaging to cell phone users regarding
ongoing promotions can be very effective in increasing sales through mobile notifications.
o Create state of the art IT platform that enhances the customers online shopping
experience.

Todays technological innovations offer unlimited boundaries, creating a virtual shopping

experience where buyers can design a personal avatar while clicking on a garment offers an
instant image of how the product would look on them.
o Establish seasonal booths to sell seasonal items in shopping malls where there is no
storefront available.
Gap, Inc. does not have a brick and mortar store on all shopping malls, thus, having seasonal
booths generate product visibility and increasing sales at a lower cost.

C.

Functional:
Objectives & Strategies:
Research and Development
o Analyze trends in the global market to best capitalize on the changing environment.
Obesity is a growing condition in our society. The number of women wearing plus size clothing
are increasing gradually; Gap, Inc. should take advantage of this emerging market and open a
product line designed for these women.
Sales and Marketing
o Utilize social media marketing to reach new and existing customers.
Focus on flooding social media through Facebook, Twitter, and blogs to disseminate
promotions and newly-released products.
Production
o Utilize Six Sigma experts to gain understanding of how to become more efficient.
Six Sigma Quality Programs utilize advanced statistical methods to improve quality by reducing
defects and variability in the performance of business processes. Gap, Inc. can utilize the Six
Sigma program to improve its performance using the DMAIC process. This endeavor will prove
to be very useful if the company pursues some backward integration strategies e.g. acquiring
textile/fabric manufacturers.

o Outsource non-core activities

Outsourcing activities that have less impact on the companys core competency such as store
maintenance/upkeep (cleaning services), maintenance services for store equipment
(registers/display racks/scanners, etc.) can be cost-effective.

Finance
o
o
o
o

Develop cost benefit analysis for investment in IT applications

Perform gap analysis between high performing stores and low performing stores.
Go to market to identify hedge funds to mitigate any increases in raw materials.
Pursue funding for expansion in new and existing markets.
IMPLEMENTATION
Goal #1: Capitalize peak shopping season by utilizing booths in shopping malls where stores are
not present.
Participants: Chief Financial Officer, President, Gap Inc., Global Human Resources and
Corporate Affairs, Gap Inc. Marketing Department, Legal Department
Steps:

President and CFO to review business case and assumptions before sign off.

Legal Department to review contractual agreements for leases related to booths.

Marketing to determine key locations to maximize profitability.

Human Resources to source positions at various locations.

Goal #2: Expand product line to include plus size clothing line
Participants: Chief Financial Officer, President, Marketing Department

Steps:

Conduct research to determine demand for new products

Create clothing design

Determine stores to carry clothing line

Introduce marketing campaign to drive sales

Goal #3: Expand operations in Asia

Participants: Chief Financial Officer, President, International Strategist, Gap Inc., Global
Human Resources and Corporate Affairs, Gap Inc. Marketing Department, Legal Department
Steps:

Assess product needs within the overseas market.

Develop entry plan

Develop understanding of culture, laws and regulations in Asia.

Replicate strategies used in previous global expansions

Implement marketing programs to gain market share.

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.