Gap 2011

Forest David

A.

Case Abstract
Gap is a comprehensive strategic management case that includes the companys year -end 2010 financial statements, organizational chart, competitor information and more. The case time setting is the year 2011. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in San Francisco, California, Gaps common stock is publicly traded under the ticker symbol GPS. The huge clothing retailer Gap has been filling closets with jeans and khakis, T-shirts, and poplin more than three decades. The firm, which operates about 3,100 stores worldwide, owns and operates the urban chic chain Banana Republic, budgeteer Old Navy, online-only retailer Piperlime, and Athleta, a purveyor of activewear via catalog. Other brand extensions include GapBody, GapKids, and babyGap; each also has its own online incarnation. All Gap clothing is private-label merchandise made exclusively for the company. From the design board to store displays, Gap controls all aspects of its trademark casual look.

B.

Vision Statement (proposed)

To become the number one specialty apparel company in the world.

C.

Mission Statement (proposed)

Gap strives to be recognized as the top choice in speciality retail clothing (2) worldwide by staying ahead of the competition on the latest trends and fashion (7). At Gap, we use the latest technology (4) to produce the best and most cost effective products (5) for our customers (1) around the world (3). We also work diligently to make a positive impression in the communities in which we operate, believe that good ethics is good business and treat our employees with respect and provide fair compensation and benefits for them(6, 8, 9). 1. 2. 3. 4. 5. 6. 7. 8. 9. Customers Products or services Markets Technology Concern for survival, growth, and profitability Philosophy Self-concept Concern for public image Concern for employees

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D.

External Audit
Opportunities 1. 2. 3. 4. 5. 6. 7. 8. 9. Eastern Europe is a fast growing market with Ukraine leading the way. Baby Boomers are the largest per capita consumers of apparel. 71 million teens in the US are maturing into young adults. Consumers age 20-34 account for 24% of the appeal spending in the US. Consumers make choices at the last second and styles must be adaptable. Social media enables retailers to listen to customers in real time. US consumers spent $192 billion in 2010 on apparel. Southeast Asia has many skilled workers trained in apparel. There continues to be reduced trade regulations and elimination of tariffs.

Threats 1. 2. 3. 4. 5. 6. 7. US is still suffering from high unemployment around 9% and low home prices. High oil prices increase transportation costs. Volatile nature of world currency rates. Cotton prices are up over 100% from 2009. Many consumers are obsessed with promotional pricing. Strong competition from Abercrombie & Fitch, American Eagle, VF Corp. and others. S&P lowered the job outlook several times in 2011.

Competitive Profile Matrix

VF Corp. Critical Success Factors Advertising Market Penetration Product Variety Store Locations R&D International Markets Financial Profit Customer Loyalty Market Share Product Quality Top Management Price Competitiveness Totals Weight 0.09 0.11 0.07 0.10 0.08 0.06 0.10 0.09 0.10 0.08 0.04 0.08 1.00 Rating 3 3 4 4 3 3 1 3 4 4 3 3 Score 0.27 0.33 0.28 0.40 0.24 0.18 0.10 0.27 0.40 0.32 0.12 0.24 3.15 GAP Rating 2 2 3 3 2 2 3 2 2 2 2 4 Score 0.18 0.22 0.21 0.30 0.16 0.12 0.30 0.18 0.20 0.16 0.08 0.32 2.43 Nike Rating 4 4 2 1 4 4 4 4 3 3 4 2 Score 0.36 0.44 0.14 0.10 0.32 0.24 0.40 0.36 0.30 0.24 0.16 0.16 3.22

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EFE Matrix
Weight Rating Weighted Score Opportunities 1. Eastern Europe is a fast growing market with Ukraine leading the 0.10 3 0.30 way. 2. Baby boomers are the largest per capita consumers of apparel. 0.04 2 0.08 3. 71 million teens in the US are maturing into young adults. 0.07 4 0.28 4. Consumers age 20-34 account for 24% of the appeal spending in 0.07 4 0.28 the US. 5. Consumers make choices at the last second and styles must be 0.06 2 0.12 adaptable. 6. Social media enables retailers to listen to customers in real time. 0.04 2 0.08 7. US consumers spent $192 billion in 2010 on apparel. 0.07 3 0.21 8. Southeast Asia has many skilled workers trained in apparel. 0.06 3 0.18 9. There continues to be reduced trade regulations and elimination 0.05 3 0.15 of tariffs.
Threats 1. US has high unemployment around 9% and low home prices. 2. High oil prices increase transportation costs. 3. Volatile nature of world currency rates. 4. Cotton prices are up over 100% from 2009. 5. Many consumers are obsessed with promotional pricing. 6. Strong competition from Abercrombie & Fitch, American Eagle, VF Corp. and others. 7. S&P lowered the job outlook several times in 2011. 8. TOTALS 0 Weight Rating Weighted Score 0.05 0.08 0.04 0.10 0.05 0.08 0.04 0.00 1.00 2 2 2 2 2 3 2 0 0.10 0.16 0.08 0.20 0.10 0.24 0.08 0.00 2.64

E.

Internal Audit
Strengths 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Has stores in 29 countries in Asia, Europe, Latin America, Middle East, Australia, and the US. Has 180 franchise stores and plans to increase that to 400 by 2015. Employs 134,000 people with 3,321 stores worldwide. Diverse brands including Gap, Banana Republic, Old Navy, Piperlime and Athleta. Is working with Visa to deliver real-time discounts via SMS text messages. Well represented with women in upper management. Excellent liquidity ratios. Expects to have 45 stores in China by year end 2012. Is the largest US clothing seller. Only 1.5% of Gaps total assets come from Goodwill.

Weaknesses 1. 2. 3. By the end of 2013, Gap plans to close over 100 more of its namesake stores in the U.S. Has no formal vision or mission statement. Has a hybrid divisional structure and would be best suited with a SBU structure.

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4. 5. 6. 7.

Offshore production does not allow Gap to adjust to quickly changing customer preferences. Gaps PE Ratio is 10 compared to the industry average of 17. Poor position for equity financing. Paid $99M over book value for Athleta. Focused only in the casual clothing market for customers generally under 34 years old.

Financial Ratio Analysis Growth Rate Percent Sales (Qtr vs year ago qtr) Net Income (YTD vs YTD) Net Income (Qtr vs year ago qtr) Sales (5-Year Annual Avg.) Net Income (5-Year Annual Avg.) Dividends (5-Year Annual Avg.) Profit Margin Percent Gross Margin Pre-Tax Margin Net Profit Margin 5Yr Gross Margin (5-Year Avg.) Liquidity Ratios Debt/Equity Ratio Current Ratio Quick Ratio Profitability Ratios Return On Equity Return On Assets Return On Capital Return On Equity (5-Year Avg.) Return On Assets (5-Year Avg.) Return On Capital (5-Year Avg.) Efficiency Ratios Income/Employee Revenue/Employee Receivable Turnover Inventory Turnover Net Worth Analysis (in millions)
Stockholders' Equity Net Income x 5 (Share Price/EPS) x Net Income Number of Shares Outstanding x Share Price Method Average $4,080 $6,020 $12,874 $9,925 $8,225

Gap 2.10 NA -19.20 -1.75 1.26 17.32

Industry 10.00 NA 25.50 4.93 4.34 9.57

S&P 500 14.50 NA 48.60 8.30 8.72 5.61

39.0 12.2 7.4 37.8

40.0 10.7 6.9 36.3

39.5 18.2 13.2 39.7

0.53 2.2 1.4

1.04 2.4 1.4

0.98 1.3 0.9

29.3 14.4 20.0 21.1 12.4 17.1

30.2 12.0 16.0 19.5 9.3 12.7

26.0 8.8 11.8 23.8 8.0 10.8

8,134 109,694 82.6 5.3

24,619 342,949 78.4 5.0

126,792 1 Mil 15.2 12.4

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IFE Matrix
Strengths 1. Has stores in 29 countries in Asia, Europe, Latin America, Middle East, Australia, and the US. 2. Has 180 franchise stores and plans to increase that to 400 by 2015. 3. Employs 134,000 people with 3,321 stores worldwide. 4. Diverse brands including Gap, Banana Republic, Old Navy, Piperlime and Athleta. 5. Is working with Visa to deliver real-time discounts via SMS text messages. 6. Well represented with women in upper management. 7. Excellent liquidity ratios. 8. Expects to have 45 stores in China by year end 2012. 9. Is the largest US clothing seller. 10. Only 1.5% of Gaps total assets come from Goodwill. Weight Rating Weighted Score 0.10 0.08 0.03 0.08 0.04 0.03 0.05 0.04 0.05 0.08 4 4 4 4 4 3 4 4 4 4 0.40 0.32 0.12 0.32 0.16 0.09 0.20 0.16 0.20 0.32

Weaknesses 1. By the end of 2013, Gap plans to close over 100 more of its namesake stores in the U.S. 2. Has no formal vision or mission statement. 3. Has a hybrid divisional structure and would be best suited with a SBU structure. 4. Offshore production does not allow Gap to adjust to quickly changing customer preferences. 5. Gaps PE Ratio is 10 compared to the industry average of 17. Poor position for equity financing. 6. Paid $99M over book value for Athleta. 7. Focused only in the casual clothing market for customers generally under 34 years old. 8. 0 TOTALS

Weight Rating Weighted Score 0.08 0.03 0.07 0.05 0.07 0.06 0.06 0.00 1.00 1 1 1 1 1 1 2 0 0.08 0.03 0.07 0.05 0.07 0.06 0.12 0.00 2.77

F.

SWOT
SO Strategies 1. 2. Build 200 new stores in Eastern Europe (S1, S2, O1). Build 50 stores in China (S4, S8, O8).

WO Strategies 1. 2. Develop a formal Vision and Mission Statement (W2, O7). Develop a SBU structure (W3, O7, O9).

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ST Strategies 1. 2. Build 50 stores in China (S1, S4, S8, T1). Form alliance with cell phone providers to notify customers of discounted items via text messages (S5, T5).

WT Strategies 1. 2. Develop a SBU structure (W3, T6). Develop a new formal strategic plan to determine direction of the company (W1, W7, T1, T5, T6).

G.

SPACE Matrix
FP 7 6 5 4 3 2 1

Conservative

Aggressive

CP

-7

-6

-5

-4

-3

-2

-1 -1 -2 -3 -4 -5 -6 -7

IP

Defensive

SP

Competitive

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Internal Analysis: Financial Position (FP) Return on Investment (ROE) Debt to Equity Current Ratio Working Capital Cash Flow Financial Position (FP) Average
Internal Analysis: Competitive Position (CP) Market Share Product Quality Customer Loyalty Technological know-how Control over Suppliers and Distributors Competitive Position (CP) Average

4 6 5 3 3 4.2

External Analysis: Stability Position (SP) Rate of Inflation Technological Changes Price Elasticity of Demand Competitive Pressure Barriers to Entry into Market Stability Position (SP) Average
External Analysis: Industry Position (IP) Growth Potential Financial Stability Ease of Entry into Market Resource Utilization Profit Potential Industry Position (IP) Average

-2 -2 -2 -5 -3 -2.8

-3 -4 -3 -3 -4 -3.4

3 3 3 3 3 3.0

H.

Grand Strategy Matrix

Rapid Market Growth Quadrant II Quadrant I

Gap

Weak Competitive Position

Strong Competitive Position

Quadrant III Slow Market Growth

Quadrant IV

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I.

The Internal-External (IE) Matrix

The Total IFE Weighted Scores
Strong 4.0 to 3.0 4.0 I Average 2.99 to 2.0 II Weak 1.99 to 1.0 III

High

3.0

IV

VI

The EFE Total Medium Weighted Scores

Gap

2.0

VII

VIII

IX

Low

1.0

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Fiscal Year 2010 Brand:

GAP

($ in Millions) Old Navy Banana Republic

Other

Total

Percentage of Net Sales

Region: US Canada Europe Asia Other Regions Total Stores reportable segment Direct reportable segment Total

$3,454 341 703 872 -05,370 365 $5,735

$4,945 427 -0-0-05,372 533 $5,905

$2,084 190 36 118 -02,428 155 $2,583

-0-047 59 89 195 246 $441

$10,483 958 786.5 1,049 89 13,365 1,299 $14,664

71% 7 5 7 1 91 9 100%

J.

QSPM
Add new stores Develop strategic plan
AS 2 2 2 2 3 0 2 0 3 TAS 0.20 0.08 0.14 0.14 0.18 0.00 0.14 0.00 0.15

1. 2. 3. 4. 5. 6. 7. 8. 9.

Weight Opportunities Eastern Europe is a fast growing market with Ukraine leading the 0.10 way. Baby Boomers are the largest per capita consumers of apparel. 0.04 71 million teens in the US are maturing into young adults. 0.07 Consumers age 20-34 account for 24% of the appeal spending in 0.07 the US. Consumers make choices at the last second and styles must be 0.06 adaptable. Social media enables retailers to listen to customers in real time. 0.04 US consumers spent $192 billion in 2010 on apparel. 0.07 Southeast Asia has many skilled workers trained in apparel. 0.06 There continues to be reduced trade regulations and elimination 0.05 of tariffs.

AS 4 1 3 3 1 0 3 0 4

TAS 0.40 0.04 0.21 0.21 0.06 0.00 0.21 0.00 0.20

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Weight Threats 1. US is still suffering from high unemployment around 9% and low 0.05 home prices. 2. High oil prices increase transportation costs. 0.08 3. Volatile nature of world currency rates. 0.04 4. Cotton prices are up over 100% from 2009. 0.10 5. Many consumers are obsessed with promotional pricing. 0.05 6. Strong competition from Abercrombie & Fitch, American Eagle, 0.08 VF Corp and others. 7. S&P lowered the job outlook several times in 2011. 0.04

AS 2 0 0 0 0 2 1

TAS 0.10 0.00 0.00 0.00 0.00 0.16 0.04

AS 3 0 0 0 0 4 2

TAS 0.15 0.00 0.00 0.00 0.00 0.32 0.08

Add new stores

Strengths 1. Has stores in 29 countries in Asia, Europe, Latin America, 2. Has 180 franchise stores and plans to increase that to 400 by 2015. 3. Employs 134,000 people with 3,321 stores worldwide. 4. Diverse brands including Gap, Banana Republic, Old Navy, Piperlime and Athleta. 5. Is working with Visa to deliver real-time discounts via SMS text messages. 6. Well represented with women in upper management. 7. Excellent liquidity ratios. 8. Expects to have 45 stores in China by year end 2012. 9. Is the largest US clothing seller. 10. Only 1.5% of Gaps total assets come from Goodwill. Weight 0.10 0.08 0.03 0.08 0.04 0.03 0.05 0.04 0.05 0.08 AS 4 4 0 1 1 0 0 4 0 0 TAS 0.40 0.32 0.00 0.08 0.04 0.00 0.00 0.16 0.00 0.00

Develop strategic plan

AS 3 3 0 3 3 0 0 2 0 0 TAS 0.30 0.24 0.00 0.24 0.12 0.00 0.00 0.08 0.00 0.00

1. 2. 3. 4. 5. 6. 7. 8.

Weaknesses By the end of 2013, Gap plans to close over 100 more of its namesake stores in the U.S. Has no formal vision or mission statement. Has a hybrid divisional structure and would be best suited with a SBU structure. Offshore production does not allow Gap to adjust to quickly changing customer preferences. Gaps PE Ratio is 10 compared to the industry average of 17. Poor position for equity financing. Paid $99M over book value for Athleta. Focused only in the casual clothing market for customers generally under 34 years old. 0

Weight 0.08 0.03 0.07 0.05 0.07 0.06 0.06 0.00

AS 1 1 2 0 0 0 1 0

TAS 0.08 0.03 0.14 0.00 0.00 0.00 0.06 0.00

AS 4 4 4 0 0 0 3 2

TAS 0.32 0.12 0.28 0.00 0.00 0.00 0.18 0.00

TOTALS

2.94

3.46

K.

Recommendations
1. Add 300 new stores over next 3 years. $750M 2. Develop new strategic plan $50M

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3. Restructure the company into a SBU $10M 4. Form alliance with Verizon to notify customers via text messages new appeal arrivals.

L.

EPS/EBIT Analysis (in millions)

Amount Needed: $810M Stock Price: $19.46 Shares Outstanding: 510 Interest Rate: 5% Tax Rate: 39%

EBIT Interest EBT Taxes EAT # Shares EPS

Common Stock Financing Recession Normal $1,500 $2,000 0 0 1,500 2,000 585 780 915 1,220 552 552 1.66 2.21

Boom $2,500 0 2,500 975 1,525 552 2.76

Recession $1,500 41 1,460 569 890 510 1.75

Debt Financing Normal $2,000 41 1,960 764 1,195 510 2.34

Boom $2,500 41 2,460 959 1,500 510 2.94

EBIT Interest EBT Taxes EAT # Shares EPS

Recession $1,500 32 1,468 572 895 518 1.73

20 Percent Stock Normal $2,000 32 1,968 767 1,200 518 2.32

Boom $2,500 32 2,468 962 1,505 518 2.90

Recession $1,500 8 1,492 582 910 543 1.68

80 Percent Stock Normal $2,000 8 1,992 777 1,215 543 2.24

Boom $2,500 8 2,492 972 1,520 543 2.80

M.

Epilogue
Gap plans to close over 100 more of its namesake stores in the U.S. by the end of 2013, part of a company strategy to reduce its total square footage across all brands, and Gap in particular. By the end of 2012, Gap Inc. will have reduced its total real estate square footage in North America by 10 percent compared to 2007 levels. Gap brand will cut its square footage 34 percent overall (compared to 2007 levels), resulting in 700 U.S. and Canada Gap stores and 250 Gap Outlet stores at the end of 2013. The company has 78 stores in and around Los Angeles. International sales and emerging Gap brands such as Athleta and Piperlime remain Gap's primary growth vehicles as well as e-commerce. Athleta and Piperlime appear to be the only brands who will add North American square footage in coming years. Gap plans to test a bricks-and-mortar Piperlime store concept next year. A similar test of Athleta led to the activewear brand opening its first flagship in Fillmore Street in San Francisco in January 2011.

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In contrast to Gaps USA strategy, the company plans to triple the number of its namesake stores in China by the end of 2012. The company will have opened 15 Gap stores by year-end 2011 in China and plans to have a total of 45 by the end of 2012. In addition, Gap entered the South American market by opening its first store in Chile in October 2011, and will open stores in Panama and Colombia in 2012. That first Gap store in Chile is located at the Parque Arauco Mall in Santiago. Gap will open another store in Concepcion in November. The company plans to open Gap and Banana Republic stores in Panama starting with locations in Panama City in January 2012, and it will open stores in Bogota, Colombia, in late 2012. All of these new stores will have Gap, GapKids, babyGap and Banana Republic products. Gap has expanded to 29 countries in Asia, Europe, Latin America and the Middle East in the past five years, opening franchise locations in 10 new countries in fiscal 2011 alone. Gap remains the largest U.S. clothing seller.

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