The 3 things Gap needs to fix to turn around its struggling business

Gap needs a new game plan — and fast.

In April, the retailer announced the departure of the head of its Old Navy business, which was hit by marketing mistakes and supply chain upheavals after being a driver of the company’s growth during the pandemic.

Then, in July, Gap CEO Sonia Syngal abruptly resigned after about two years on the job as sales continued to decline and challenges mounted.

Gap has since named a new leader for Old Navy, who took over just earlier this month. But it still needs a permanent leader to steer the comprehensive business — which includes its namesake brand, Banana Republic and Athleta — toward expanding its revenue.

Gap is scheduled to report its fiscal second-quarter results Thursday afternoon, and the company has said it expects sales for the period to fall by a high single-digit percentage from a year ago.

Large markdowns to clear bloated inventories are expected to hurt gross margins, with Gap forecasting its adjusted operating margin in the quarter to be flat to slightly negative.

Analysts are expecting the company to report a loss of five cents per share on sales of $3.82 billion, according to Refinitiv estimates. This would represent a 9% drop in revenue from the year-ago period.

Gap shares are down more than 40% so far this year, as of Tuesday’s market close.

Dana Telsey, chief executive at Telsey Advisory Group, described the company as suffering from “unstable performance across brands, uncertainties in leadership and direction, and a lack of visibility towards stabilization with a clear plan for recovery”.

Here are three things Gap needs to get its business into better shape.

The company has been without a leader since Syngal left last month, causing uncertainty over its future.

Bob Martin, Gap’s executive chairman, has served as interim president and CEO, with Syngal assisting for a brief transition period. But analysts and investors want to see a permanent replacement with a strong track record.

Jane Hali & Associates retail analyst Jessica Ramirez said she would like to see a CEO with a strong background in retail who will push the company to innovate — especially in its Banana Republic division, for which she said needs to find a new identity coming out of the pandemic.

Banana Republic, once a destination for workwear, is struggling to adapt as more people work from home or opt for more relaxed styles.

“Gap seems to constantly miss what the consumer is looking for,” Ramirez said. “There’s something that just doesn’t stick.”

Old Navy, known for its budget-friendly clothing for children and adults, has been crucial to Gap’s success and accounts for more than half of the company’s global net sales of $16.7 billion in fiscal 2021.

Business was in such a slump that in 2019 Gap said it would spin Old Navy into a separate publicly traded entity. But those plans were scrapped in January 2020, with the company saying its performance had softened and that the costs of completing such a split would outweigh the benefits.

Then the Covid-19 pandemic hit and even bigger cracks began to form.

Old Navy’s net sales in the three-month period ended April 30 fell 19% from a year earlier to $1.8 billion. Same-store sales, which track revenue online and at stores open for at least 12 months, fell 22%.

Gap increased losses on size and assortment imbalances due to persistent inventory delays. He also acknowledged that a push to sell more plus-size items at Old Navy resulted in the retailer carrying too many of its extended sizes and not enough of its core sizes.

In July, Deutsche Bank downgraded Gap shares to “hold” from “buy” due to “low visibility” around top-line recovery at Old Navy. Increased promotions in the apparel space are also likely to have a negative impact on Old Navy, he said.

Earlier this month, Horacio “Haio” Barbeito — most recently president and CEO of Walmart Canada — took over as head of the business.

It was June 2020 when rapper Kanye West first announced that he would be collaborating with Gap on a clothing line called Yeezy. More than two years later, it’s unclear how much the Yeezy gear will move the needle for Gap, if at all.

The first item from the much-anticipated Yeezy Gap line, a $200 nylon jacket, didn’t go on sale online until June 2021. But then, in November, Syngal told analysts on an earnings call that one of the Yeezy hoodies featured the most high of the song. -Daily online sales in Gap history.

The items that have since debuted through a partnership with luxury fashion house Balenciaga are mostly unisex in shape and monochromatic in style: a $340 parka, a $120 quarter-sleeve Y-shirt, and $300 tracksuits.

Gap recently began carrying the products in some of its stores, including its flagship store in Times Square in New York City. But the introduction of giant trash bags full of Yeezy Gap merchandise at malls across the country has created confusion and been mocked online.

A representative from Gap did not respond to CNBC’s request for comment about the display.

An analyst at Wells Fargo had estimated that the Yeezy line would add roughly $1 billion in incremental revenue to Gap. But West’s creations should make people spend money once they attract fans to stores.

“No matter what Kanye does, people are going to follow Kanye. He can bring people through the door,” Ramirez said. “But if Gap’s current assortment isn’t something the consumer wants to stick with, they won’t.”