Gap Inc'S Structure And Goals Compared To Retail Industry Standards

Introduction

Company Description

GAP Incorporation is one of the leading retailers in the world, boasting 3,194 Company-operated stores as well as having 472 franchisee-owned stores worldwide. Several notable brands can be immediately recognized, such as Banana Republic, Old Navy and the Gap. Other brands have recently been launched, which are Intermix, Hilly City and Athleta. In a highly competitive environment of global apparel retail, maintaining brand and image is GAP’s main concerns as negative viewpoints could adversely affect the firm’s financial positions.

Background

The Gap, Inc originally started out as a denim company in 1969 out of the founders’ desire to find something that could fit him. It went public in 1976 with an initial offer of 1.2 million shares and its charitable counterpart, Gap Foundation, was established within a year. (Gap Inc, History). The firm truly expanded after acquiring Banana Republic and expanding internationally, starting with its foray in the European markets such as London in the late 1980s. Perhaps boldened by their multinational expansion, it underwent massive company transformation by utilizing online shopping, starting a corporate social responsibility report as well as acquiring more brands such as Athletica and Intermix.

As of last year, Gap Inc is pulling in $16,680 million in revenues and their recent strategies could be the reason why this firm is still a major player in the fierce global retail industry. In 2016, it was listed as one of the top companies for largest premium apparel retailers worldwide (Largest Premium, 2016). In 2017, Gap garnered a 1.20% of the market share in the US for women’s apparel brands. (Top Women, 2017).

Current Events

Just a few days, Gap Inc expanded its Loyalty Program to all of its US locations. Additionally, it was placed 3rd for using and promoting the use of globally sustainable cotton. It also garnered the award for best place to work for in the UK for LBGT employees (GapInc.com, Main Page).

Industry Analysis

General Characteristics

The global retail industry is extremely fierce as each competitor not only has to compete with local players but also multinational enterprises who are well established in the retail sector. With concerns on sustainability and corporate social responsibility being on an average consumer’s mind, a successful retail firm has to maintain a positive brand in order to profit and stay afloat in this cutthroat business.

For consistency, accuracy and relevance, data will be sourced according to the North American Industry Classification (NAICS). The NAICS code for Gap, Inc is 88140, which is the family clothing industry.

The apparel industry covers a multitude of products, from simple shoes to expensive Dior-like dresses. The products are further segmented by sex and age, such as men and children’s apparel. Retailers are often faced with decisions of either to make or outsource the products. Additionally, apparel firms also have to be constantly updated with the consumers’ wants and needs to avoid obsolete inventory that could be a costly investment.

In light of the internet and the targeted customer segment of millennials constantly going to shop online rather than travel to physical branches, retail companies also have to adapt to the modern technology platforms that are available and forever changing. In the past, malls were a favorite pastime with all ages. Now, with big firms like Amazon leading the way to online shopping, other brands, including Gap and the Children’s Place, placed their bets on the e-commerce. Most, if not all, are at least staying afloat in this cutthroat market. It’s just a matter of how well each apparel firm handles its operations and how quickly it can adapt to new policies like the increased tariffs in 2018.

Structures

Risk Management Association eStatements database system was used as a source for the data, in the years of 2016 to 2018. The condition for the data is that it originates from companies who are pulling in 25 million or more in sales.

Operating Cost Structure. Using net sales as the base for the vertical analysis of the income statement, there appears to be an upward trend of gross profit of 45.6%, 45.1% and 49.4% in 2016, 2017 and 2018 respectively. However, an increase in operating expenses is also seen, with numbers of 38.8% in 2016, 42.9% in 2017 and 45% in 2018. It is a little troubling to see that positive growth be offset by an increase in expenses. Thus, with the increase in expenses occurring, it’s not surprising to see operating profit decrease, which it did by almost three times from 2016 to 2017, from 6.8% to 2.2%. 2018 saw a doubling in the profit but not enough information is present to see the drivers behind that doubling.

Asset Structure. No absolute trends can be seen for the current assets of the industry. Cash and equivalents increased slightly from 14.2% in 2016 to 15.4% in 2017. It dropped quite a bit down to 11.9% in 2018. This could suggest that cash was used to pay off liabilities and/or stockholders. Trade receivables and inventory have been fairly constant in 2017 and 2018. What’s interesting to note is the increase on an annual basis for fixed assets, with 21.7% in 2016, 22.1% in 2017, and 24.9% in 2018. This could be related to global expansions but not enough information is given to confirm this.

Major Players

Out of the worldwide competitors in the retail industry, the top ones mentioned by Gale Business Insights are Inditex (Spain), H&M (Sweden), Gap, Inc. (USA), Marks & Spencer (UK) and Hudson’s Bay Company (Canada).

Future Growth and Development

Currently, prospects are looking positive, as evidenced by a 0.2 from 2004-2014 and is projected to be another 0.5 growth from 2014-2024 (Industry Employment, 2015). What’s also noticeable is that collection days have decreased, almost by half from 2016 to 2017, with collection going from 4.80 days to 2.60 days (Dun & Bradstreet). Fiscal year 2018 saw no change and indicates that the family clothing industry has focused on sharpening its efficiency in its operations. Unfortunately, the most recent news of another round of tariffs coming into effect will dampen down sales as effects of tariffs will impact consumers by price increases.   Comment by Alex Monty: Check on MLA format

Company Analysis

Corporate Mission and Goals

Gap Inc. prides itself on being defined by its people. The firm welcomes all personalities as it believes that they drive the success behind the “dedicated, eclectic, passionate culture.” (Gap Inc Brands). Gap Inc.’s belief that success should be made available to everyone is emphasized and applied through the following values: diversity & inclusion, equal pay and sustainability.

Business Product Lines

Gap offers the typical attire found in a retail firm: denim, t-shirts, button-downs and khakis. It also sells accessories and attire for all ages, as seen in stores like babyGap, GapMaternity, GapKids and GapBody. Its most recent acquisitions of Athleta and Intermix allow Gap to expand its offerings to include fitness attire, perhaps out of customers’ increased interest in health and fitness.

Business Segments

As stated in the 10-K report filed 19 March 2019, Gap, Inc has identified the following operating segments: Old Navy Global, Gap Global, Banana Republic Global, Athleta and Intermix.

Structures

Operating Cost Structure

Using total assets and total liabilities as the base for their respective sections in the balance sheet, a vertical common analysis was performed for both Gap and the industry. Being able to hold and sell inventory is important for any retail company and it’s interesting to see that Gap has lower inventory % than the Industry. Gap’s inventory levels with respect to its assets stayed a consistent value around 25% (24.05% in 2016, 25% in 2017 and 26.48% in 2018) while the industry averages hover around 42% or so (42.7% in 2016, 41.5% in 2017, and 42.3% in 2018). Whether or not if the lower inventory is deliberate as part of Gap’s store policy or perhaps coincidental, that remains to be seen.

Another important pattern seen is the subsequent trends of cash decreasing and accounts payable decreasing as well for Gap. The firm’s cash % are 23.43% in 2016, 22.32% in 2017 and 13.43% in 2018. Its accounts payable are as follows 16.33% in 2016, 14.78% in 2017 and 13.99% in 2018. On the other hand, the accounts payable is increasing in the apparel industry: 4.5% in 2016, 4.1% in 2017 and 6.00% in 2018. On a whole, Gap appears to have more cash on hold with respect to its assets than its counterparts in the industry.

However, it’s concerning to see that the firm’s accounts payable are considerably tied up in its total liabilities, more so than the industry averages for the same period. At least Gap is profiting more than the industry in terms of income before taxes: 7.24% in 2016 vs 5.7%, 8.98% vs 1.4% in 2017 and 7.97% vs 3.7% in 2018 (Gap vs Industry). Gap also has lower operating expenses than the industry: 28.67% in 2916, 28.93% in 2017 and 29.92% in 2018. The industry’s operating expenses actually increased: 38.8% in 2016, 42.9% in 2017 and 45% in 2018. This pattern could suggest the industry is not handling its operations as well as it should, at least compared to Gap.

Asset Structure

Both Gap and Industry have an increasing trend in the net tangible fixed assets. Gap’s tangible assets are as follows: 31.36% in 2016, 31.81% in 2017 and 33.90% in 2018. The industry also increased albeit lower values - 21.7% in 2016, 22.1% in 2017 and 24.9% in 2018. Gap clearly has more tangible assets than the industry. However, given that the RMA doesn’t offer a distinction between fixed assets other than construction in progress and construction in progress assets, it can’t be confirmed if companies in the industry are expanding in other countries by doing brick-and-mortar type stores or whether equipment is bought at a lesser rate than Gap.

Gap does have a stable but lower rate in the intangibles asset, meaning that they most likely have lesser amounts of trademarks, copyrights or other intangibles in comparison to the industry. Gap’s intangible asset amounts are 2.68% in 2016, 2.55%in 2017 and 2.50% in 2018. The industry’s values are 4.6% in 2016, 9.5% in 2017 and 7.8% in 2018. In fact, it appears that the industry has been procuring more of its intangibles than Gap. The firm seems to have an interest in hedging funds to offset loss from foreign exchange rates by having a sizable 3.58% in 2018 for marketable securities and a 4.20% in the investments in that same year. Before 2018, Gap had negligible amounts in both asset accounts.

Investment and Expansion

Gap’s Board of Directors recently announced a plan to separate the firm into Old Navy and “NewCo” out of the belief that the separation will help each company focus on their intended audience (Gap 10-K). The firm’s investments in Additionally, international expansion, while possible, could be unsuccessful due to risk factors that are out of the company’s controls. Risks associated with international expansion include foreign vendors not adhering to the firm’s values and international franchisees’ financial positions. (Gap 10-K).