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GAP Inc.

Strategic Audit

GAPs Inc. Strategic Audit

Presented To: Dr. Saneya AL Galaly

Presented By:
Nevine Roushdy: (External Environment & Internal Environment Analysis) Rania Habib: (Analysis of Strategic Factors & Strategic alternatives) Dina Sameh: (Implementation and Evaluation & Control) Amr Negeda: (Current Situation & Corporate Governance)

GAP Inc. Strategic Audit

Abstract This paper is a strategic audit 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 d e s c r i p t i o n p r o c e s s , i t i n c l u d e s t h e f o u r m a j o r b r a n d s t h a t a r e p a r t o f G a p , I n c . T h e s e brands include Gap, Banana Republic, Old Navy and Piperlime. A Managerial Analysis is included herewith that gives an insight into SWOT analysis and Porters 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. F u t u r e expectations and possib le diversification or anti-

d i v e r s i f i c a t i o n p r o c e s s t h a t t h e corporation can practice are also part of the paper. As a conclusion, the paper sums up ideas from a group of four undergraduate students and incorporates them to breakdown the strategic and financial aspect of Gap, Inc.

GAP Inc. Strategic Audit

Contents 1. Current Situation. ........................................................................................................... 5 A. Current Performance (ROI. MS, Profitability) .................................................................. 6 B. Strategic Posture. (Mission. Obj., Strategies, Policies) ................................................... 16 2. Corporate Governance. ................................................................................................. 22 A. Board of Directors. ....................................................................................................... 22 B. Top Management. ........................................................................................................ 34 3.External Environment: Opportunities and Threats (SWOT) ................................................ 38 A. Sustainability Issues. B. Societal Environment.... 1.Economical Analysis 2. Political Analysis 3. Technological Analysis. ............................................................................................ 44 4. Socioculturall Analysis. ............................................................................................ 46 C. Task Environment .. 1. Threat of new entrance.. 2. Bargaining power of buyers.. 3. Threat of Substitute products. 4. Bargaining power of supplier.. 5. Rivalry among competing firms. C. External Factors Analysis Summary (EFAS). ................................................................... 65 4. Internal Environment: Strengths and Weaknesses (SWOT) ............................................ 67 A. Corporate Structure. ..................................................................................................... 67 B. Corporate Culture. ........................................................................................................ 68 C. Corporate resources...................................................................................................... 71 D. Internal Factors Analysis Summary (IFAS). ................................................................... 92 5. Analysis of strategic Factors (SWOT). ............................................................................ 93
A. Situational Analysis. ...................................................................................................... 98

B. Review of Mission and Objectives. ................................................................................ 99

GAP Inc. Strategic Audit


Strategic Alternatives and Recommended Strategy. .................................................... 103

A. Strategic Alternatives .................................................................................................. 103

B. Recommended Strategy .............................................................................................. 106 7. 8. Implementation.......................................................................................................... 107 Evaluation and Control ............................................................................................... 107

A. Output controls .......................................................................................................... 107

B. Input controls ............................................................................................................. 107 C. Behavior controls ........................................................................................................ 107 D. Risk Management ....................................................................................................... 107 List of Figures: Figure 1 Organization Chart for GAP Inc .......................................... Error! Bookmark not defined. Figure 4 Organization Chart for GAP International ......................... Error! Bookmark not defined. Figure 5: SWOT Analysis for GAP Inc ............................................... Error! Bookmark not defined. List of Tables: Table 1: Comprehensive Income Statements .. ........................................................................... 7 Table 2: Balance Sheets . ................................................................................................................ 9 Table 3: Cash Flows...5 Table 4: Financial Analysis Ratios ................................................................................................. 79 Table 5 EFAS table for Gap Inc. 65 Table 6: IFAS table for GAP Inc. ..32 Table 7: SFAS Matrix for GAP Inc .................................................................................................. 98 Table 8: TOWS Matrix for GAP Inc .............................................................................................. 103

GAP Inc. Strategic Audit Introduction

Gap Inc. is a leading international clothing retailer offering attire, accessories and personal care products for men, women, children and babies. The company represented one of the most impressive success stories in the history of the U.S. retail business. It is an American clothing and accessories retailer based in San Francisco, California, and founded in 1969 by Donald G. Fisher and Doris F. Fisher. The company has five primary brands: the namesake Gap banner, Banana Republic, Old Navy, Piperlime and Athleta. As of September 2011, Gap, Inc. has approximately 135,000 employees and operates 3,076 stores worldwide, of which 2,551 are in the United States. Gap, Inc. remains the largest specialty apparel retailer in the U.S., though it has recently been surpassed by the Spanish-based Inditex Group as the world's largest apparel retailer. Despite the company's publicly traded status, the Fisher family remains deeply involved in Gap, Inc.'s business and collectively own a significant quantity of the company's stock. Donald Fisher served as Chairman of the Board until 2004, playing a role in the ouster of then-CEO Millard Drexler in 2002, and remained on the board until his death on September 27, 2009. Fisher's wife and their son, Robert J. Fisher, also serve on Gap's board of directors. I created Gap with a simple idea: to make it easier to find a pair of jeans. We remain committed to that basic principle. Don Fisher, Gap Inc. Founder and Chairman. says, We try to put out affordable, casual designs of shirts and jeans while providing value to the shareholders and making a positive impact in the community.

GAP Inc. Strategic Audit I. Current Situation.

A. Current Performance Return on Investment:

Market Share: Specialty retailer Gap, Inc. (GPS: News ) announced Thursday plans to boost its market share in the $1.4 trillion global apparel market over the next three to five years. Shifting marketing dollars to woo new customers, particularly younger ones, as well as African-, Asian- and Hispanic-Americans, where in all cases, Gap's market share is too low. In the past, we didn't put enough money into acquiring new customers, Murphy said during his presentation at the Bank of America Merrill Lynch 2011 Consumer Conference. Maximizing the pipeline, which the ceo said is faster after being overhauled last year. He cited a huge opportunityto fill in with trend-right product and chase products that make sense to usand focus on new category development, which have been shortfalls. At Old Navy, he said, jewelry will become a significant category.

GAP Inc. Strategic Audit

Profitability: Financial Statements and Analysis Table 1: Income Statements
Currency in Millions of US Dollars
Revenues total revenues cost of goods sold gross profit selling general & admin expenses, total depreciation & amortization, total other operating expenses, total operating income interest expense interest and investment income net interest expense currency exchange gains (loss) other non-operating income (expenses) ebt, excluding unusual items other unusual items, total ebt, including unusual items income tax expense earnings from continuing operations net income net income to common including extra items net income to common excluding extra items Jan 31 2009 Reclassified Jan 30 2010 Reclassified Jan 29 2011 Jan 28 2012 Press Release 14,549.0 14,549.0 9,275.0 5,274.0 3,836.0 -3,836.0 1,438.0 -69.0 --69.0 --1,369.0 -1,369.0 536.0 833.0 833.0 833.0 833.0

As of:

4 Year Trend

14,526.0 14,526.0 9,079.0 5,447.0 3,892.0 2.0 3,894.0 1,553.0 -1.0 37.0 36.0 --1,589.0 -5.0 1,584.0 617.0 967.0 967.0 967.0 967.0

14,197.0 14,197.0 8,473.0 5,724.0 3,922.0 6.0 3,928.0 1,796.0 -6.0 7.0 1.0 32.0 1.0 1,830.0 -14.0 1,816.0 714.0 1,102.0 1,102.0 1,102.0 1,102.0

14,664.0 14,664.0 8,775.0 5,889.0 3,912.0 4.0 3,916.0 1,973.0 -6.0 6.0 3.0 8.0 1,990.0 -8.0 1,982.0 778.0 1,204.0 1,204.0 1,204.0 1,204.0

GAP Inc. Strategic Audit

Year over year, Gap Inc. has seen net income shrink from $1.2B to $833.0M despite relatively flat revenues. A key factor has been an increase in the percentage of sales devoted to the cost of goods sold from 59.84% to 63.75%.

GAP Inc. Strategic Audit

Table 2: Balance Sheets
Jan 31 2009 Reclassified Jan 30 2010 Reclassified Jan 29 2011 Jan 28 2012 Press Release

Currency in Millions of US Dollars

As of:

4 Year Trend

Assets cash and equivalents short-term investments total cash and short term investments accounts receivable total receivables Inventory prepaid expenses deferred tax assets, current restricted cash other current assets total current assets gross property plant and equipment accumulated depreciation net property plant and equipment goodwill deferred tax assets, long term other intangibles other long-term assets total assets 1,715.0 -1,715.0 --1,506.0 353.0 166.0 41.0 224.0 4,005.0 7,245.0 -4,312.0 2,933.0 99.0 273.0 98.0 156.0 7,564.0 2,348.0 225.0 2,573.0 150.0 150.0 1,477.0 140.0 193.0 18.0 113.0 4,664.0 7,427.0 -4,799.0 2,628.0 99.0 320.0 87.0 187.0 7,985.0 1,561.0 100.0 1,661.0 205.0 205.0 1,620.0 142.0 190.0 7.0 101.0 3,926.0 7,573.0 -5,010.0 2,563.0 99.0 231.0 77.0 169.0 7,065.0 1,885.0 -1,885.0 --1,615.0 ---809.0 4,309.0 --2,523.0 ---590.0 7,422.0

liabilities & equity

GAP Inc. Strategic Audit


accounts payable accrued expenses current portion of long-term debt/capital lease current income taxes payable other current liabilities, total unearned revenue, current total current liabilities long-term debt other non-current liabilities total liabilities common stock additional paid in capital retained earnings treasury stock comprehensive income and other total common equity total equity total liabilities and equity

975.0 406.0 50.0 57.0 415.0 255.0 2,158.0 -1,019.0 3,177.0 55.0 2,895.0 9,947.0 -8,633.0 123.0 4,387.0 4,387.0 7,564.0

1,027.0 649.0 -41.0 170.0 244.0 2,131.0 -963.0 3,094.0 55.0 2,935.0 10,815.0 -9,069.0 155.0 4,891.0 4,891.0 7,985.0

1,049.0 590.0 -50.0 173.0 233.0 2,095.0 -890.0 2,985.0 55.0 2,939.0 11,767.0 -10,866.0 185.0 4,080.0 4,080.0 7,065.0

1,066.0 998.0 59.0 5.0 --2,128.0 1,606.0 933.0 4,667.0 2,755.0 ----2,755.0 2,755.0 7,422.0

GAP Inc. Strategic Audit

Table 3: Cash Flows
Jan 31 2009 Reclassified Jan 30 2010 Reclassified Jan 29 2011 Jan 28 2012 Press Release 833.0 506.0 -506.0 -4.0 ---1,363.0 -548.0 --100.0 -454.0 16.0 1,646.0 1,662.0 ----


Currency in Millions of US Dollars

As of:

4 Year Trend

net income depreciation & amortization amortization of goodwill and intangible assets depreciation & amortization, total tax benefit from stock options change in inventories change in accounts payable change in income taxes change in other working capital cash from operations capital expenditure sale of property, plant, and equipment cash acquisitions investments in marketable & equity securities cash from investing short-term debt issued long-term debt issued total debt issued short term debt repaid long term debt repaid total debt repaid

967.0 643.0 10.0 653.0 -1.0 51.0 -4.0 -94.0 -201.0 1,412.0 -431.0 1.0 -142.0 176.0 -398.0 -----138.0 -138.0

1,102.0 643.0 12.0 655.0 -6.0 43.0 40.0 64.0 82.0 1,928.0 -334.0 1.0 --225.0 -537.0 -----50.0 -50.0

1,204.0 639.0 9.0 648.0 0.0 -127.0 -7.0 66.0 -179.0 1,744.0 -557.0 --125.0 -429.0 6.0 -6.0 -3.0 --3.0

GAP Inc. Strategic Audit


issuance of common stock repurchase of common stock common dividends paid total dividend paid other financing activities cash from financing foreign exchange rate adjustments net change in cash

75.0 -705.0 -243.0 -243.0 6.0 -1,005.0 -18.0 -9.0

56.0 -547.0 -234.0 -234.0 4.0 -771.0 13.0 633.0

70.0 -1,959.0 -252.0 -252.0 11.0 -2,127.0 25.0 -787.0

62.0 -2,092.0 -236.0 -236.0 2.0 -602.0 17.0 324.0

GAP Inc. Strategic Audit

Facts: Companies acquired by Gap Inc. Banana Republic (1983) Company-operated locations:


About 3,000 stores across the United States, United Kingdom, Canada, China, France, Ireland, Japan and Italy. The first Gap store outside the United States opened in the UK in 1987 Franchise: About 200 stores in locations across Asia, Australia, Eastern Europe, Latin America, the Middle East and Africa Distribution Centers Total: 12 United States: 9 Canada: 1 United Kingdom: 1 Japan: 1 Online Customers in more than 90 countries can order from GAP brands U.S.-based websites, and those in China, Canada and the UK are served by dedicated websites. Employees About 132,000 employees around the world support Gap Inc. and its five brands.

GAP Inc. Strategic Audit

Divisions of Gap Inc.: Forth & Towne (Apparel) LLC Gap International Sourcing (Holdings) Limited Banana Republic (Japan) Y.K. Gap International Sourcing Pte. Ltd Gap International Sourcing (U.S.A.) Inc. Gap (UK Holdings) Ltd Old Navy (Apparel) LLC Forth & Towne (ITM) Inc Gap (Canada) Inc Gap International Sourcing Srl Athleta (ITM) Inc GPS (Bermuda) Insurance Services Ltd Old Navy (Canada) Inc Gap Europe Ltd Old Navy (ITM) Inc Gap (Apparel), LLC Gap (Japan) K.K. Gap International Sourcing (California), Inc GPS Corporate Facilities Inc GPS Sourcing (South Africa) Ltd Piperlime (Japan) G.K. Gap International Sales, Inc Gap International Sourcing LLC Gap (Puerto Rico) Inc Gap International Sourcing (Honduras) S.A. de C.V. GPS Park Restaurant, Inc Banana Republic (ITM) Inc F&T Services LLC Gap International Sourcing Ltd Gap International Sourcing (Thailand) Limited GPS Services Inc Gap (RHC) B.V. Forth & Towne (Japan) Y.K. Gap International Sourcing Inc Gap Stores (Ireland) Limited GPS Strategic Alliances LLC GPSDC (New York) Inc Gap Europe Holdings B.V. Gap (France) SAS. Gap Services, Inc


GAP Inc. Strategic Audit

Athleta Inc GPS Consumer , Inc GPS (Great Britain) Ltd GPSV LLC Old Navy (Japan) Y.K. Gap International B.V. Gap (Netherlands) B.V. Goldhawk B.V. Gap International Sourcing (India) Private Limited GPS Distribution Facilities, LLC Banana Republic (Apparel) LLC Consumer Services LLC Gap International Sourcing (Americas) LLC WCB Twenty-Eight Partnership Gap International Sourcing FZE Gap (UK) Limited Gap International Sourcing (Mexico) S.A. de C.V. GPS Real Estate Inc Gap (ITM) Inc GapKids GapBody Gap Outlet Baby Gap


GAP Inc. Strategic Audit


B. Strategic posture. I. GAP Inc.s mission statement. 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 easier 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 our 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 our business in a socially responsible way. A mission statement evaluation Gap, Inc. is a brand-builder. We create emotional connections with customers (1Customer) around the world (3 Markets) through inspiring product design, unique store and renowned ecommerce experiences (4 Technology), and compelling marketing. Our purpose? Simply to be a leader in the specialty family clothing (2 Product/ self concept) industry to make it easy for you to express your personal style throughout your life (7 Philosophy). We have more than 150,000 passionate, talented people around the world who help bring this purpose to life for our customers (9 employees), 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 survival growth): integrity, respect, openmindedness, quality and balance (6 Philosophy/self concepts). Every day, we honor these values and exemplify our belief in doing business in a socially responsible way (8 public image).

GAP Inc. Strategic Audit


The mission illustrates an adherence to the definition of a good mission statement. As stated by David (2009), the mission statement is a declaration of an organizations reason for being. The first line of Gap, Inc.s mission statement, Gap, Inc. is a brand-builder, clearly answers this question and is supported by the fact that Gap, Inc. is currently comprised of five specialty brands and continues to introduce many apparel lines under those brands. A good mission statement should also state the companys beliefs. The Gap, Inc. mission statement lists a set of key values designed to inform us of their beliefs. The key values of integrity, respect, open-mindedness, quality and that balance are immediately identifiable as ethical management practices. Their presence in the mission statement leads one to assume that Gap, Inc. will treat all consumers, employees, and vendors fairly. II. GAP Inc.s 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.

GAP Inc. Strategic Audit

III. GAP Inc.s 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.


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.


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 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

GAP Inc. Strategic Audit


of 2010. One 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. 5. 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.

VI. GAP Inc.s Policies Gap Inc. was founded on the principle of doing business responsibly, honestly and ethically. We take corporate compliance very seriously. Our comprehensive corporate compliance program is designed to ensure that all employees and the company's Board of Directors (directors) not only meet legal requirements around the world, but also operate responsibly and with integrity in everything they do. A combination of written guidelines, formal processes and management oversight helps us ensure that "strong corporate compliance" aren't just words on paper, but a way of doing business at Gap Inc.

Our Code of Business Conduct has been the foundation of our corporate compliance program since 1998. Some highlights:

GAP Inc. Strategic Audit


Each employee and director of the company is responsible for complying with the Code of Business Conduct.

All of our employees around the world receive a copy of the Code when they join the company and agree in writing to comply with it.

Each employee worldwide is required to complete the Principles of Integrity: Code of Business Conduct Overview training course, which reinforces the company's commitment to the Code.

On an annual basis, senior employees must certify their compliance with the Code.

All employees are regularly reminded of the Code and are encouraged to report any suspected violations through the company's Open Door process, the mailbox or the Code Hotline.

Reflecting the global reach of our company and diversity of our employees, the Code is published in eight languages.

Global Integrity & Compliance Department

To enhance our existing corporate compliance program, in 2003 the company created a compliance department recently renamed Global Integrity & Compliance.

The department's objective is to embed compliance infrastructure and the company's commitment to integrity into global business solutions and culture.

Under the guidance of the Chief Compliance Officer, Michelle Banks, the department leads the company's efforts to promote and enforce compliance with our Code of Business Conduct. Ms. Banks reports directly to Gap Inc.'s CEO.

Global Integrity & Compliance works closely with other departments including Human Resources, Corporate Communications, Internal Audit, Loss Prevention and Corporate Security to raise Code awareness through communication and

GAP Inc. Strategic Audit


education, to monitor and audit Code compliance, and to investigate and respond to all suspected Code violations.

The department may be contacted at

Corporate Compliance Committee

Gap Inc. has a Corporate Compliance Committee, a group of senior leaders from various company divisions and functions that focuses on monitoring the effectiveness of and providing input into the company's compliance program, as well as compliance-related risks. Ms. Banks, the company's Chief Compliance Officer, chairs this committee.

Political Engagement Policy

We believe that it is important to participate in political and regulatory processes on issues that affect our business and community interests. We work proactively to support Gap Inc.'s strategies through public policy and government advocacy. We participate in political activities and advocate for legislation when it affects our ability to grow our business in a way that is consistent with our values, legal obligations, and Codes of Business Conduct and Vendor Conduct. Read the PDF for the full text of our political engagement policy.


The head of Global Integrity & Compliance periodically reports to the Audit and Finance Committee of Gap Inc.'s Board of Directors on the effectiveness of the company's corporate compliance program. The Audit and Finance Committee has oversight responsibility for the compliance program.

We are committed to continually evolving our corporate compliance program in line with legal and regulatory requirements, corporate ethics best practices, and our own high standards.

GAP Inc. Strategic Audit


II. Corporate Governance. Gap Inc. was founded in 1969 on the principle of conducting business in a responsible, honest and ethical manner. For them, good corporate governance means going beyond compliance. It means taking a leadership role in instituting and maintaining practices that represent strong business ethics and ensuring that they communicate consistently with their shareholders, customers and neighbors around the world. They are committed to continually evolving and adopting appropriate corporate governance best practices. Gap Inc.'s Corporate Governance Guidelines were most recently updated in 2011. A. Board of Directors: Ownership. Donald George Fisher was an American businessman who founded The Gap clothing stores. Fisher was born in Cutsdean, California, to Jewish parents, Sydney Fisher, businessman, and Aileen Emanuel, a cabinetmaker. He spent his childhood in the then-middle-class Sea Cliff neighborhood of San Francisco. He graduated from Lowell High School in 1946, and then matriculated at the University of California, Berkeley, where he was a member of the both the Swimming and Water Polo Teams. He is an alumnus of the Theta Zeta chapter of the national fraternity Delta Kappa Epsilon. He earned a BS degree from the School of Business Administration at the University of California, Berkeley in 1951. Named 2007 Alumnus of the Year, Fisher had a robust college experience at Berkeley where his nickname was Horny Fish and where he was caught cheating by then-Professor Clark Kerr. Kerr gave Fisher an F, but did not have him expelled. Had he been expelled, he writes, *it+ would have changed my life completely. Fisher says he still thinks about his cheating and Kerr's response today. According to Forbes magazine, his net worth was estimated to be US$3.3 billion.

GAP Inc. Strategic Audit

Current Gap Inc. board members


James M. Schneider Board member since: 2003 James M. Schneider has been Chairman of Frontier Bancshares, Inc. since February 2007 and served as Senior Vice President of Dell Inc. from 2000 to February 3, 2007. He previously served as Chief Financial Officer of Dell Inc. from 2000 to December 2006

Paul Pressler Paul Pressler is an advisor of the New York- and London-based private equity firm Clayton, Dubilier & Rice. Formerly president and CEO of Gap, Inc. and Chairman of Walt Disney Parks and Resorts, Pressler is also a director of Avon Products Inc., Overture Acquisition Corporation, Advanced Sensor Technology, OpenTable, and Web Personal Assistant. A longtime supporter of Big Brothers Big Sisters of America, Pressler served on the organization's Greater Los Angeles board of directors from 19942002 and on the National board of directors from 2002- 2009. Pressler was the president and CEO of Gap, Inc. from September 2002 to 22 January 2007. He also served on the company's Board of Directors. Before Gap, Pressler spent 15 years with The Walt Disney Company, most recently as chairman of the Parks and Resorts division. Prior to that he was president of Disneyland, president of the Disney Store chain and senior vice president of Disney Licensing. Before joining Disney he was vice president of design and marketing for Kenner-Parker Toys. A New York native, Pressler received a bachelors degree in business economics from the State University of New York in Oneonta-New York.

Meg Whitman Board Member since September 30, 2003 Margaret C. "Meg" Whitman, former President and CEO of famous online marketplace, eBay, was born and raised in Long Island, New York. She is a BS Economics graduate from

GAP Inc. Strategic Audit


Princeton University and she received her MBA at Harvard Business School. She is considered by Forbes magazine as one of "The 100 Most Powerful Women". A few Board Members include: - Sole Domenico De, Board Member - Adrian D P Bellamy, Board Member - Doris Fisher, Board Member - Donald Fisher, Board Member - Robert J. Fisher, Board Member - Penelope L Hughes, Board Member - Bob L Martin, Board Member - Howard Behar, Board Member - Jorge P Montoya, Board Member - Mayo A Shattuck III, Board Member

The Role of the BOD The board is responsible for oversight of the business, affairs and integrity of the company, determination of the companys mission, long-term strategy and objectives, and oversight of the companys risks while evaluating and directing implementation of company controls and procedures.

The board may delegate some of its responsibilities to the committees of the board of directors. Composition and Qualifications of the Board of Directors (a) Size of the Board As provided by the company's Bylaws and by resolution of the board of directors, the current number of board members can vary according to the boards needs. The number of directors is currently set at 11. (b) Mix of Management Directors and Independent Directors. The board believes that as a matter of policy there should be at least a majority of independent directors as defined under SEC and NYSE rules (Independent directors) on the board. In addition, the board

GAP Inc. Strategic Audit


believes that it is most desirable for Independent directors to constitute two-thirds or more of the board, and is committed to maintaining such levels barring unforeseen circumstances, including mid-year resignations. For a nominee to be considered an Independent director, the board must also affirmatively determine that the director has no material relationship with Gap Inc. Directors who are officers or employees of the company are considered management directors (Management directors). The board may also consist of directors who are not officers or employees of the company but who are also not considered independent (these directors with the Independent directors are considered Non-Management directors). (c) Qualifications and Diversity of Board Members. All board members possess certain core competencies, some of which may include experience in retail, consumer products, international business/markets, real estate, store operations, logistics, product design, merchandising, marketing, general operations, strategy, human resources, technology, media or public relations, finance or accounting, or experience as a CEO or CFO. In addition to having one or more of these core competencies, board member nominees are identified and considered on the basis of knowledge, experience, integrity, leadership, reputation, and ability to understand the companys business. The board believes that diversity, including differences in backgrounds, qualifications, experiences, and personal characteristics, including gender and ethnicity/race, is important to the effectiveness of the boards oversight of the company. Nominees are pre-screened to ensure each candidate has qualifications which compliment the overall core competencies of the board. The screening process includes conducting a background evaluation and an independence determination. (d) Selection of New Board Members. The Governance and Nominating Committee has the responsibility to identify, screen, and recommend qualified candidates to the board. Qualified candidates are interviewed by the Chairman and CEO as well as at least two Independent directors. Certain other directors and members of management will interview each candidate as requested by the Chairman, CEO or chair of the Governance and

GAP Inc. Strategic Audit


Nominating Committee. In addition, the committee will consider candidates recommended by shareholders in the manner set forth in the Bylaws. (e) Director Election Vote Response. At any meeting of the shareholders at which a director is not elected in accordance with the Bylaws, that director shall submit to the Board an offer letter of resignation, subject to board acceptance. The Governance and Nominating Committee will consider the offer of resignation and will recommend to the board the action to be taken. The board shall act promptly with respect to each such letter of resignation and shall promptly notify the director concerned of its decision. The boards decision would be disclosed publicly within 90 days from the date of certification of the election results. Education and Evaluation of the Board of Directors (a) Onboarding. The company has a formal onboarding program whereby each new director is provided with core materials and asked to complete a series of introductory meetings to become knowledgeable about the companys business and familiar with the senior management team. In addition, new directors make store and facility visits to the extent practical. A new director is expected to complete his or her onboarding program within six months after joining the board. (b) Continuing Education. The company has a continuing education program to ensure existing directors stay current with the companys business and objectives as well as relevant industry information and other external factors such as corporate governance requirements and best practices. As part of the program, directors are encouraged to periodically attend appropriate continuing education seminars or programs which would be beneficial to the company and the directors service on the board. (c) Annual Performance Evaluation. The Governance and Nominating Committee oversees a formal evaluation process to assess the composition and performance of the board, each committee, and each individual director on an annual basis. The assessment is conducted to ensure the board, committees, and individual members are effective and productive and to identify opportunities for improvement and skill set needs. As part of the process, each

GAP Inc. Strategic Audit


member completes a questionnaire. While results are aggregated and summarized for discussion purposes, individual responses are not attributed to any member and are kept confidential to ensure honest and candid feedback is received. The Governance and Nominating Committee reports annually to the full board with its assessment. Directors will not be nominated for reelection unless it is affirmatively determined that the director is substantially contributing to the overall effectiveness of the board. Board of Directors Guidelines (a) Retirement Age. A director who turns 72 prior to the end of a fiscal year will not stand for re-election at the next Annual Meeting following the end of the fiscal year. (b) Change of Status. In the event a Non-Management director changes his or her employer, significantly changes his or her position with an employer or significantly changes his or her responsibilities as a director, consultant or otherwise, the director shall submit to the Corporate Secretary of the company an offer letter of resignation, subject to board acceptance. The Governance and Nominating Committee will consider the NonManagement directors offer of resignation and will recommend to the board the action to be taken. The board shall act promptly with respect to each such letter of resignation and shall promptly notify the director concerned of its decision. Management directors are also expected to tender their resignation from the board to the Corporate Secretary of the company at the same time they cease to be an executive officer of the company. (c) Term Limits. There will be no specific term limits for directors, given the normal process of annual elections of board members by the shareholders, annual evaluations, and the stated retirement age. Directors who have served on the board for an extended period of time are in a unique position to provide valuable insight into the operations and future of the company based on their experience with and perspective on the companys history, performance, and objectives. The board believes that, as an alternative to term limits, it can take proactive steps to effectively ensure that the board continues to evolve and adopt new viewpoints through the evaluation and selection process described in these guidelines.

GAP Inc. Strategic Audit


(d) Stock Ownership. Each Non-Management director will, within three years of joining the board hold stock of the company worth at least three (3) times the annual base retainer then in effect. The in-the-money value of outstanding vested options granted under the Nonemployee Director Deferred Compensation Plan that was terminated in September 2005, deferred stock units granted under the 2011 Long-Term Incentive Plan, including any units acquired through reinvestment of dividend equivalents, will be counted toward meeting this stock ownership requirement. Management directors are required to own stock of the company in accordance with the company's stock ownership requirements for executives. (e) Improper Financial Interests. Generally, directors should limit equity or debt investments in vendors, landlords, competitors or potential competitors of the company. A current or potential investment in excess of either 5% of a companys equity or debt or 5% of a directors net worth (including a right to acquire that percentage) should be brought to the attention of the companys Chief Compliance Officer to determine if the investment or potential investment could be considered an improper financial interest under the companys Code of Business Conduct. Depending on the circumstances, the Chief Compliance Officer might conclude that an investment above these parameters is proper. (f) Other Company Directorships and Consulting. The company believes that directors who are full-time employees of other companies should not serve on more than three public company boards at one time, and that directors who are retired from full-time employment should not serve on more than five public boards. Additionally, a director that is a member of the Audit and Finance Committee cannot sit on more than three public company audit committees. Further, when a director has been invited to join another for-profit company board, he or she must inform the Chairman and the Chair of the Governance and Nominating Committee prior to accepting and consider the nature of and time commitment of such an appointment prior to accepting. A director may not serve on a board of a company competitor or a company with a significant competitive line of products offered by Gap Inc. Additionally, a director should

GAP Inc. Strategic Audit


not act as a consultant or provide other services to a vendor, landlord, competitor, potential competitor or a company with a potential competitive line of products without bringing it to the attention of the companys Chief Compliance Officer to determine if the engagement creates a conflict of interest. The Governance and Nominating Committee considers these matters when evaluating and nominating directors for reelection. The Chairman and CEO must obtain approval from the board to serve as a director on any other for-profit board. (g) Independent Advisors. The board and each committee have the power to hire independent legal, financial or other advisors at any time, as they deem necessary and appropriate to fulfill their board and committee responsibilities. The company will provide funding for such advice and for ordinary administrative expenses as determined by the board or committees. (h) Board Access to Senior Management. Board members have complete access to the company's management and employees. Any meetings or contacts that a director wishes to initiate may be arranged directly or through the office of the CEO or Corporate Secretary. It is assumed that board members will use judgment to ensure that contacts with management outside of board meetings are not unduly disruptive to the business operations of the company. Board Members and/or senior management should also feel free to request the attendance at board meetings of management or employees who can provide additional insight into items being discussed. (i) Shareholder Access to Board. Shareholders may communicate governance matters directly to the board by sending email to Communications will be received by the Chairman and Lead Independent Director, as well as the companys Corporate Secretarys Office. As deemed appropriate, matters may be referred to the entire board, board committees, individual members, or other departments within the company. Compensation of the Board of Directors (a) Board Compensation Review. The Compensation and Management Development Committee periodically reviews and makes recommendations to the board concerning the level and form of compensation of the Non-Management directors. The committee's

GAP Inc. Strategic Audit


recommendation, which is discussed and evaluated by the full board, is based on both an assessment of the best practices of other companies and the particular circumstances of this board. Changes in board compensation, if any, must be approved by the full board. (b) Director Compensation. The Non-Management directors annual base retainer is currently $70,000 per annum, plus an attendance fee of $1,500 for each regularly scheduled committee meeting attended. Non-management directors who primarily reside outside of North America receive a fee of $2,000 for attendance at each board and/or committee meeting requiring travel to the United States. The Governance and Nominating Committee Chair receives an additional retainer of $10,000 per annum. The Audit and Finance Committee Chair and the Compensation and Management Development Committee Chair each receive an additional retainer of $20,000 per annum. The Lead Independent director receives an additional retainer of $20,000 per annum. In addition, Non-Management directors are eligible to receive stock unit awards according to a pre-determined formula as follows: (i) upon appointment each new Non-Management director is awarded units equal to $125,000 at the then-current fair market value; and (ii) annually, each continuing NonManagement director is awarded units equal to $125,000 at the then-current fair market value (recently appointed Non-Management directors first annual stock unit grant shall be prorated based on the number of days that the director has served between the appointment date and the first annual stock unit grant). Normally, the stock units are immediately vested as of the award date with payment in shares deferred for 3 years unless further deferred at the election of the Non-Management director. (c) Travel. All Non-Management directors reasonable travel arrangements related to attending board, committee or company business meetings are made by the company. Alternatively, the company can reimburse the Non-Management director for reasonable travel expenses. (d) Discount. All directors are eligible to receive discounts on company merchandise consistent with the terms of the Employee Merchandise Discount Policy.

GAP Inc. Strategic Audit

Board Committees


(a) Existing Committees. The current board committees are: (1) Audit and Finance, composed solely of Independent directors; (2) Compensation and Management Development, composed solely of Independent directors who also meet the requirements of Section 16 of the Securities Exchange Act of 1934 and Section 162(m) of the Internal Revenue Code; and (3) Governance and Nominating, composed solely of Independent directors. As set forth under the company's Bylaws, the board has the discretion to form new committees or dissolve existing committees depending upon the circumstances. (b) Audit and Finance. The Audit and Finance Committee assists the board in fulfilling its oversight responsibilities relating to the integrity of the financial statements, compliance with legal and regulatory requirements, the independent accountants qualifications and independence, the performance of the internal audit function and the performance of the independent accountant, and to handle such other matters as formalized in the Audit and Finance Committee Charter. (c) Compensation and Management Development. The functions of the Compensation and Management Development Committee are to evaluate and determine compensation policies, including level and form, for all corporate and divisional officers and certain employees, to recommend compensation for Non-Management directors, to advise senior management on policy and strategy regarding succession planning and the development and retention of senior executives and management teams, and to handle such other matters as formalized in the Compensation and Management Development Committee Charter. (d) Governance and Nominating. The Governance and Nominating Committee makes recommendations to the board on all matters concerning corporate governance and directorship practices as formalized in the Governance and Nominating Committee Charter, including development of corporate governance guidelines, evaluation of the board, committees and individual directors, and identification and selection of new board nominees.

GAP Inc. Strategic Audit

Meetings and Materials


(a) Board Meeting Schedules and Agendas. There are five to six regularly scheduled board meetings during each fiscal year. The Chairman, Lead Independent Director, and Corporate Secretary establish the agenda for each board meeting. Management, in consultation with the appropriate committee chair, determines the frequency, length of, and agendas for the meetings of the committees. Each board member is encouraged to suggest agenda items for board and committee meetings in advance. (b) Distribution of Materials. Detailed and updated financial and business information is frequently distributed to the board. During those months when there is a scheduled board or committee meeting, materials are distributed approximately one week prior to the meeting along with written materials regarding each planned presentation. The presentation materials allow for proper preparation and consideration of the subject matter before the board or committee meeting. Board members are expected to have read the material in advance of the meeting. (c) Attendance of Directors and Non-Directors at Board and Committee Meetings. Board members are expected to attend all meetings of the board and committees on which they sit, in their entirety. In the event a board member is not able to attend a meeting in person he or she may attend the meeting by videoconference or teleconference, but this should be a rare exception. As the board and/or each committee deems appropriate, other individuals may be invited to attend portions of each board or committee meeting. (d) Meetings of Independent Directors. The Independent directors typically are scheduled to meet without the presence of management during each regularly scheduled board meeting. (e) Annual Meetings of Shareholders. The Chairman, Lead Independent Director and committee chairs should attend and be available to answer questions at the annual shareholders' meeting as reasonably practicable. All other directors are also encouraged to attend the annual shareholders' meeting.

GAP Inc. Strategic Audit



(a) Chairman and CEO Selection. The board selects the CEO and Chairman in the manner that it determines to be in the best interests of the company. In the event the director who serves as Chairman is not an Independent director, the board will designate an Independent director to serve as Lead Independent Director. (b) Duties of the Lead Independent Director. The Lead Independent Director presides at all meetings of the board at which the Chairman is not present, including each Independent session of the board. The Lead Independent Director has the authority to call meetings of the independent directors. The Lead Independent Director also serves as a liaison between the Chairman and the independent directors, approves certain information sent to the board, and approves meeting schedules and agendas. The Lead Independent Director is appointed by the Independent directors annually. (c) Job Duties of Chairman, CEO, and other Officers. The company has approved formal position descriptions for the Chairman, CEO, and brand/function heads. The performance of the CEO and brand/function heads is reviewed annually with respect to their stated duties and with respect to pre-determined company and divisional objectives. (d) Succession Planning. The board is responsible for the succession planning of the CEO (including a separate emergency succession plan), and periodically reviews the succession plan and identifies potential successors for the company's CEO. The Compensation and Management Development Committee also periodically reports to the board on succession planning matters. In addition, the CEO reports periodically to the board on succession plans for certain key officers and makes recommendations to the board regarding his/her succession. Integrity and Conduct Each board member is expected to act with integrity and to adhere to the policies applicable to directors in the Company's ethics code, the Code of Business Conduct. Any waiver of the requirements of the Code of Business Conduct for any individual director

GAP Inc. Strategic Audit


would require approval by the Audit and Finance Committee. Any such waiver would be publicly disclosed.

B. Top Management. They have a diverse and talented executive management team focused on executing Gap Inc.'s strategy to engage customers and maximize shareholder returns.

GAP Inc. is led by Glenn Murphy, who has served as our Chairman and Chief Executive Officer (CEO) since August 2007. They believe that having Mr. Murphy act in both these roles is most appropriate for the Company at this time because it provides the Company with consistent and efficient leadership, both with respect to the Companys operations and the leadership of the Board. In particular, having Mr. Murphy act in both these roles increases the timeliness and effectiveness of the Boards deliberations, increases the Boards visibility into the day-to-day operations of the Company, and ensures the consistent implementation of the Companys strategies.

Michelle Banks is Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer of Gap Inc. In her current role, Michelle is responsible for oversight of the global archives, records and privacy; equity administration; governance; integrity and compliance; legal; and regulatory compliance functions. She joined the Gap Inc. Legal Department in 1999. Prior to becoming General Counsel in 2006, Michelle established and led Gap Inc.s corporate compliance and corporate governance functions. Before joining Gap Inc., Michelle was in-house legal counsel for the NBAs Golden State Warriors, and prior to that, worked in Japan as American counsel for ITOCHU Corporation, a publicly held trading company. She was also associated with several law firms, including Morrison & Foerster in California and New York, focusing on corporate finance and international transactions.

GAP Inc. Strategic Audit


Michelle graduated from UCLA with degrees in Law and Economics, and was admitted to the California bar in 1988. Michelle serves on the Board of Directors of Minority Corporate Counsel Association and is Chair of the Executive Advisory Council of the Association of Corporate Counsel Bay Area Chapter. She also serves as Chair of United Way of the Bay Areas legal community cabinet.

Jack Calhoun is the President of Banana Republic, a division of Gap Inc. Before taking on the role of President in 2007, Jack was EVP of Merchandising and Marketing at Banana Republic. Along with his responsibilities for all aspects of merchandising and marketing, he was instrumental in developing the brand's growth strategies, and he successfully led growth initiatives including launching a new elevated handbag line and a new personal care suite of fragrances and ancillary products. Jack joined Gap Inc. in 2003, coming from Charles Schwab & Co. where he was the Executive Vice President of Brand Management and Advertising. Prior to that, he spent six years leading teams at Foote, Cone & Belding and Young & Rubicam, where he served as General Manager of the San Francisco office. He also held marketing positions at Levi Strauss & Company and The Procter & Gamble Company. Jack attended Indiana University School of Music, received a B.S. from Purdue University, and an M.B.A. from Harvard Business School. Jack currently serves on the Board of Directors of the Mitchell Gold furniture company and on the Board of Directors of the San Francisco Opera, one of the worlds leading opera companies. He also served for five years on the Board of Directors of the national not-for-profit GLAAD (Gay and Lesbian Alliance Against Defamation). Tom Keiser is Gap Inc. Executive Vice President and Chief Information Officer. Tom is responsible for the entire technology platform for Gap Inc., within the U.S. and abroad. Tom is a proven retail technology executive with significant experience building global platforms. Through his 20-year career, Keiser has led major global technology initiatives for consumer product and retail companies.

GAP Inc. Strategic Audit


Tom previously served as EVP and CIO for Limited Brands, where he spearheaded a multi-year, transformational program to build a new business and technology operating model to support current and future business needs. During 12 years with Ernst & Young, he gained significant international expertise, managing the rollout of 15 major systems in Europe, the Middle East and Africa for a range of companies, including the Coca-Cola Company. A technologist from the start, Tom began his career at BellSouth as a programmer analyst. Tom received a bachelor's degree from the University of West Florida.

Toby Lenk is President of Gap Inc. Direct, the e-commerce division of Gap Inc. He is responsible for the direction and management of Gap Inc.'s popular retail websites:,,, and Lenk also oversees Gap Inc.'s private label credit card program. Under Toby's leadership, Gap Inc.'s online net sales grew to over $1 billion in 2008 and the company debuted one of the industry's first cross-brand online shopping experiences, giving customers one shopping cart, one checkout, and one flat shipping rate. In 2009, Toby and his team fully integrated the company's latest acquisition, Athleta, into the online platform while continuing to expand its online shoe and handbag brand, Piperlime, to include more than 50 contemporary apparel labels. In 2010, Toby led the company's global online expansion to Canada and the UK, as well as offering shipping to over 80 other countries. Prior to joining Gap Inc. in 2003, Toby served as CEO of GameFly, the leading online video game subscription service, which he co-founded in 2002. He now serves on the Board of Directors of GameFly. Previously, Toby was CEO of eToys, a pioneering ecommerce business he founded in 1997. Before founding eToys, he served as Vice President of Corporate Strategic Planning for The Walt Disney Company. Toby earned a B.A. in economics and government from Bowdoin College in Maine and an M.B.A. from Harvard Business School.

GAP Inc. Strategic Audit


GAP Inc. senior managers and executives pose diversified experiences including sales, marketing, merchandising, distribution, strategic planning, and finance acquired through years of experience in

GAPs Inc.
III. External Environment: Opportunities and Threats (SWOT) A. Sustainability Issues


Organizations are being challenged to find socially acceptable and ecologically proactive solutions while fulfilling economic expectations. One emerging pattern in response to this challenge is the development of sustainability goals and strategies that include the development of internal processes and systems to lower carbon footprints, address other green issues, and create more worker-friendly environments. Another emerging pattern is the capability to collaborate across the wide range of external stakeholders. External collaboration also requires the development of internal processes, systems, knowledge, and structures to support on-going learning to deal with the increasing complexity found in the multi-stakeholder domain. Gap Inc.s multi-stakeholder collaboration capability can be described as having three dimensions that have been built cumulatively over time. Initially, the organization developed an apparel factory monitoring and compliance capability in response to challenges raised by human rights groups. Limitations in the compliance approach resulted in a second set of activities that involved multiple stakeholders working together to improve a factorys overall management capacity. The third dimension expands the multi-stakeholder approach to address the more complex, industry-wide issues brought on by the systems dynamics of the supply chain. These three aspects of Gap Inc.s multi-stakeholder collaboration capability are working together to change the way garments are made, human rights are respected, and the environment restored. But they are not finished. Fifteen years of cumulative learning from engagement with stakeholders in their supply chain have led them to a new set of questions. Can their understanding of the industrys operation and the credibility and goodwill they have developed be leveraged as a strategic asset for the enterprise? Can their multi-stakeholder collaboration capability be used to effect change in the Gap Inc. organization itself? For the social and environmental responsibility group at the Gap Inc., these were important strategic considerations.

GAPs Inc.


For Gap Inc. to continue its positive impact on the industry, the ecology, and the social community, the social and environmental responsibility group saw the need to influence its own systems. Was the organization truly designed for sustainability? As the group contemplated its own strategic planning efforts, they realized that their years of capacity and capability building had produced a number of positive benefits and built an asset of credibility that could not be truly leveraged until they changed themselves. Social initiatives Gap Inc. undertook a strategy of stakeholder engagement. Stakeholder theory suggests that such an approach should be more effective in fulfilling corporate social responsibility and other business goals than focusing on compliance, but many companies continue to focus on policing supply chain labor and environmental standards. Gap's successful experiment with stakeholder engagement confirmed academic intuition about the value of stakeholder engagement. For Gap, the transition to a strategy of stakeholder engagement helped build its image as a caring company and improve outcomes for subcontractor employees after labor violations were discovered. After just a few years of this practice, Gap succeeded in both further improving the working conditions of its contractors' employees and reducing the company's status as a target for anti-globalization protesters and other activists. Gap's long supply chain is not uncommon, nor is the challenge of monitoring the social performance of thousands of subcontractors. Proactive stakeholder engagement can help avert problems in the supply chain (and elsewhere); solve problems sooner when they do appear; and enhance the company's credibility and effectiveness through partnerships with labor, environmental activists, and the broader public. Social Responsibility Ensuring that workers are treated fairly to addressing their environmental impact. GAPs Social Responsibility Specialists monitor factories in about 50 countries each year. They established a Clean Water Program in 2004 to monitor their denim laundries' wastewater discharge and to meet their guidelines.

GAPs Inc.


Their P.A.C.E. program, or Personal Advancement, Career Enhancement, empowers the mostly female garment workers who make their clothes in places like India and Sri Lanka.

Environment For Gap Inc., environmental responsibility means far more than being green or selling green products. They view it as connected to every aspect of their business, from the manufacture of their clothes to how they are packaged and shipped to the design of their stores. As a global retailer, they have the potential to make a difference on critical environmental issues, such as saving energy and combating climate change. Being environmentally responsible also supports their success as a company. They believe that it allows us to innovate, create value for our business, and meet the expectations of their customers, employees and shareholders. Over the past several years, they have worked to understand their environmental impact, design an effective strategy for driving improvements, and begin taking action across their operations. They started with a detailed analysis of the environmental challenges they face, as well as the areas over which they have the greatest control and the level of societal concern related to each. Digging even deeper, they embarked in 2008 on an environmental footprint assessment, a detailed accounting of the environmental impact of their operations. These insights have enabled them to set short- and long-term goals, direct their resources to operate more efficiently and better address climate and regulatory risks. To have the greatest positive impact, they prioritized their efforts to focus first on the facilities that they own and operate, because they have more control over the energy they use and the waste they create and, therefore, more opportunity to create immediate change. They are now beginning to look farther into their supply chain, where they believe the majority of their impact lies. The water & energy used in manufacturing their products is a significant focus of their efforts moving forward.

GAPs Inc.
Community Investment


Their vision for building stronger communities is simple: to create opportunities for people to own their future and fulfill their personal promise. Their mantra, Be Whats Possible, is a call to action to give forward, not just give back. They focus their investments on creating opportunities for underserved youth in the developed world and women in the developing world because, based on the companys assets, they see the greatest potential for impact in these areas. They also look for opportunities to deepen their impact through other activities and initiatives. They consider the organizations they support to be partner, not grantees, and provide them with programming and company assets beyond cash grants to help them maximize their impact in the community. And they invest in service leadership to unlock the power of volunteerism across the world. Their strategy: Applying business innovation to social challenges Businesses use innovation every day to solve problems and create opportunities. At Gap Inc., they apply this thinking to community investment, using innovation to solve social problems and create new possibilities. Their strategy is built on two ideas: leveraging company assets and creating a virtuous cycle.

Leveraging company asset Like most businesses, Gap Inc. has more to offer than cash to have a positive impact on the community they also call on their stores, marketing expertise, globally recognized brands, vendor relationships and, most importantly, their talented employees. For example, through volunteering their time and sharing their experience with young people; their employees across the globe help create greater and broader change in their communities. Leveraging corporate assets enables them to make a deeper impact than they could if they solely wrote a check to support a cause.

GAPs Inc.
Creating a virtuous cycle


In addition to leveraging their assets, they aim to create a "virtuous cycle" in everything they do. When they invest in community, they want to benefit all involved their employees, customers, shareholders, vendors and communities. For instance, when they partner with vendors and organizations in the developing world to advance female factory workers, they find that every party benefits as the women become more skilled at their jobs and more powerful in their communities. When everybody moves forward, initiatives gain support and continue to flourish over the long term. By designing programs that benefit all, they have shifted their model from one based on charity to an approach focused on sustainable investment. They have been practicing this new way of investing in their communities for more than five years, and as they begin to see positive results from their strategy, theyre encouraged to continue along this path. Such innovation requires thoughtful risk-taking, an appetite for learning from their mistakes and a host of supportive partners to make it happen. Employees Gap Inc. employees number more than 160,000 people around the world and the company culture encourages each one to Wear your passion. They continue to make Gap Inc. a globally effective organization and a great place to work through career advancement opportunities, workforce diversity and open dialogue. They have integrated their cultural cornerstones into everyday

communications and work streams to sustain strong employee engagement and understanding of their companys vision and direction. As Gap Inc. expanded globally, their employees stepped up again and again to help deliver positive business results in 2009 and 2010. By the end of 2010, customers in more than 90 countries could purchase their product in stores (including new markets in China and Italy), at 145 franchise locations, or online.

GAPs Inc.


Every week, 100,000 employees in their stores interact with millions of customers. And behind the scenes, at headquarters, distribution centers and beyond, thousands more are committed to making those customer interactions the best possible. They see each of these touch points as an opportunity to strengthen our relationships with their customers and each other. At the same time, they were making some important changes in their culture and their employees were enthusiastically part of that shift. In 2009, results from more than 100,000 employees in their Employee Opinion Survey showed a 23-point increase in their Belief in Company score to an industry-leading 77 percent (a number that held steady in 2010). August 21, 2009, marked Gap Inc.s 40th anniversary. To celebrate, Gap brand outfitted more than 1,200 traders with their Premium 1969 jeans to wear on the New York Stock Exchange floor as Gap Inc. executives rang the markets closing bell. Seven hundred Gap stores nationwide hosted simultaneous acoustic concerts featuring local musicians a nod to the brands first store, which sold records and tapes (in addition to jeans). Internally, they created a 40 in 40 program honoring some of the people most influential in their company history.


Societal Environment

PEST ANALYSIS For this PEST analysis we will be analyzing the apparel manufacturing industry (within the United States. In particular we will be going in-depth on the U.S industry comprised of establishments primarily engaged in manufacturing of men's, women, boys' and girl jeans, dungarees, other separate trousers, jean jackets, and shorts from purchased fabric. Gap Inc is augmented by a countless of essential external factors, which are integrated in to further maximize the potential of the company. Such factors beyond are beyond Gap Inc.'s boundaries yet they help shape the company as it is. Factors that act as

GAPs Inc.


performance catalysts for the company to function in an apt and efficient manner the external environment of Gap Inc. is comprised of the Political, economical, technological, social & cultural environment.

1. Economical Analysis The U.S economy is expected to grow at a rate of < 3% in 2010 and the recoverys weakness is evident in the job market. According to the U.S. Bureau of Labor Statistics, the unemployment rate remained unchanged at 9.5% at the end of July, 2010. Goldman Sachs forecasts an unemployment rate peak by mid-2011 and a drop back to 10.5% by the end of the same year. Thus, the U.S. is expected to witness two more years of significantly high unemployment. The persistent impact from financial crisis will mean less investment, less hiring and in-turn less consumption. Thus, it will pull down sales in the retail industry. Real GDP Real GDP is the total value of a countrys production, adjusted for inflation. A positive change in real GDP is a good indication of economic growth. The US real GDP increased in 2010 by 3.8% following a 1.7% decrease in 2009. This return to positive GDP growth is the result of the recession ending and is evidence that the economy is growing once again. The rise in GDP growth tells investors that as the economy grows, the U.S. apparel retail industry will experience growth as well. As the majority of The Gap, Inc.s stores are located in the United States; the rise in the GDP growth rate will facilitate future growth. Per Capita Disposable Income Per capita disposable income is the average amount of income per household in the United States after taxes. It provides an indication of the average households purchasing power. 2010 saw an increase of per capita disposable income of .25%,

GAPs Inc.


despite the 4.5% decrease brought by the 2008-09 recessions, and an increase of .6% in 2011. As consumers average disposable income increases, they will have more money to spend on discretionary items such as apparel. They are confident that the total revenue for the apparel retail industry will increase as higher levels of disposable income will result in higher consumer confidence and an increase in consumer spending. Unemployment Currently, 8.8 % of all Americans are unemployed. Unemployment increased by 60.34% in 2009 and 3.2% in 2010 but we believe it will decrease by 4.12% in 2011. Based on historical trends, we anticipate the rate of decline to peak in 2013, at 11.62%, and then begin to stabilize. High levels of unemployment indicate that fewer consumers have discretionary income. Our expectation that the decline will rapidly increase means that revenues from discretionary items such as apparel should rise because consumers will have more disposable income. Cotton Prices The price of cotton is the greatest factor in apparel retailers profit margins as cotton is the industrys primary raw material. The demand for cotton has been steadily increasing since 2000, which is mostly due to economic growth in India and China leading to greater demands of clothing in their middle classes. New discoveries in genetic modification, as well as more countries dedicating farmland to cotton production, have kept cotton prices stable. However, the price of cotton is volatile because of its dependence on weather. In 2010, flooding in Pakistan diminished the supply of cotton, causing prices to increase. In February of 2011, cotton prices reached an all time high. They predict these prices will fall in 2012 because of over stipulation. Oil prices raise costs through the supply chain.

GAPs Inc.


With the economy constantly growing and consumers spending increase continuously Gap Inc. has the ability to profit in sales. If the inflation rate rises in the industry, it would affect consumers spending and shopping at retail stores like the Gap with credit cards and cash. Nonfarm payroll employment increased by 193,000 in January of 2010, and the unemployment rate fell to 4.7 percent. The unemployment rate had ranged from 4.9 to 5.1 percent during most of 2011. The average hourly earnings are up from 16.16 in August of 2010 to 16.41 in January of 2011. However, the consumer price index is also up 0.7 percent, but this can be contributed to unstable and high energy prices. Pressure from inflation is also causing interest to rise, the Federal Reserve has raised its target funds rate 14 straight times by a quarter-percentage point each time to 4.5 percent, in order to gain control on inflation. The major components of spending are food, housing, apparel and services, transportation, healthcare, entertainment, and personal insurance and

pensions;account for about 90 percent of total expenditures, and of these, only the change in apparel and services was statistically significant in 2009, decreasing by 6.2 percent. Overall, consumer spending was up in the final quarter of 2010. Spending by households, which accounts for almost two-thirds of GDP, raised by 0.7 per cent in the three months to December. This is the largest quarter-on-quarter increase since autumn 2009 - matching a strong rise in retail sales at the end of last year - and is a sign that consumer spending grew after a slow start to 2010.

2. Political Analysis Political factors can have a direct impact on the way business operates. Decisions made by the government affect our everyday lives and can come in the form of policy or legislation. For the United States of America the government and nation is ran under a democracy. In this capitalistic, free market-oriented economy, corporations and other

GAPs Inc.


private firms make the vast majority of microeconomic decisions, and governments prefer to take a minimal role in the domestic economy. As a result, the U.S. has a small social safety net, and business firms in the U.S. face considerably less regulation than firms in many other nations. Employee rights in the United States have a substantial effect on business. With the apparel industry being labor-intensive, the effect employees laws have are significant. Employee laws to consider are minimum wage, over time, benefits and health and safety regulations. With the exception of Arizona, Louisiana, Mississippi, Alabama, Tennessee, and South Carolina all states have a minimum wage requirements. The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in Federal, State, and local governments. Covered nonexempt workers are entitled to a minimum wage of not less than $5.15 an hour. Overtime pay at a rate of not less than one and one-half times their regular rates of pay is required after 40 hours of work in a workweek. As well as minimum wage and over-time pay, employees are given the right to benefit plans. The ERISA, which is the Employee Retirement Income Security Act, sets uniform minimum standards to ensure that employee benefit plans are established and maintained in a fair and financially sound manner. In addition, employers have an obligation to provide promised benefits and satisfy ERISA's requirements for managing and administering private pension and welfare plans. In addition to pay regulations there are also health and safety regulations. OSHA, which stands for Occupational Safety and Health Administration helps regulate employee safety standards in all industries of the United States. Workers in the apparel manufacturers are exposed to many harmful chemicals and noises which include cotton dust, dyes, and machine noise. Also a major ill-health problem that is predominating in

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this industry is musculoskeletal discomfort from repetitive movement and sitting. OSHA requires annual safety training for employees, as well as ventilation and noise regulations. To operate in this industry it is vital to comply with these standards. Trade regulations are probably the single most important factor influencing this industry in the United States. Since the apparel industry is labor-intensive, it is exposed to overseas competition from nations where their employees receive much lower wages. By 1999 the proportion of domestically made United States retail apparel dropped to just 12 percent . As of January 1, 2005 all quotas for apparel and textile products lifted among members of the World Trade Organization, which includes most of the United States trading partners (WTO). The removal of quota and other trade barriers will serve to increase the competitive edge of countries with a mature textile and clothing industry. The United States has other trade agreements with nations such as China. The U.S-China Textile Memorandum of Understanding is an established agreement between the Government of the United States and China on restraint levels for certain textile products, produced or manufactured in China and exported to the United States during three one-year periods beginning on January 1, 2006 and extending through December 31, 2008. Operations are also subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement, the Dominican Republic Central American Free Trade Agreement, and the Egypt Qualified Industrial Zone program. Globalization has been a current trend to every industry which also includes the apparel and fashion industry in which is due to the construction of import international facilities and establishment. It has been noted that when products are traded, regulations and policies are present. With these regulations and policies, companys operations may be impaired. Some countries also control the entrance of foreign companies which would also affect the

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process of operation of these companies. Large tax implementation is one of the controls that government usually pursues. With such government control many companies are impaired and usually cannot operate on those countries. In the case of the regulations in the retail industry it has negative impacts because the regulations in the retail industry could easily be changed beyond the established limit and will affect the business adversely, in addition companies such as target will obtain higher costs in expenses due to the changes. Furthermore, changes and transformation in overtime regulations and the share of the retail stores in the healthcare bill. It has a huge effect on GAP negatively or positively. In the case of the regulations in the retail industry it has negative impacts because the regulations in the retail industry could easily be changed beyond the established limit and will affect the business adversely, in addition companies such as target will obtain higher costs in expenses due to the changes. The healthcare bill, on the other hand, will have positive effects on GAP because the bill will aid in controlling the prices of the medicines in the market which in return will help the consumers, as well as the company. Gap Inc. has a set of political and legal forces to operate and manufacture products in the industry. The manufactures Gap Inc. outsources must abide by laws such as: labor laws, health and safety laws, and respect employees right to form unions and working conditions. 3. Technological Analysis Internet shopping has changed the retail business by making it easy to navigate between many brands, categories, and products quickly. Consumers can also quickly determine whether a desired product is being sold by a competitor for a lower price. When a consumer is confident they are receiving a product for the lowest price, the decision to purchase will be easier. We expect that the trend of consumers shifting to

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purchasing online will continue and online retail sales will grow by 10% in 2011 and maintain this growth through 2014. Gap Inc. technology forces involve Gap enhancing the companys distribution centers allowing them to operate more efficiently in the industry. Gap Inc. uses products such as bar coding, e-tailing, interactive kiosks, and electronic data interchange systems to provide efficiency. For GAP Inc.: - Increasing use of technology lowers supply chain costs. - Everywhere internet access implies new avenue for direct sales. - Internet access allows greater price comparison by consumers. - Increase in communication and celebrity gazing decreases fashion shelf life, increases demand for cutting edge fashion.

4. Socio-cultural With the increasing globalization of business, society has also been more concern with the degradation of the environment and a continuous concern for the benefit of the employees. The society has call for attention to industries for social responsibility. This includes human right protection of corporate employees, consideration for the health and safety of consumers, and contribution to local communities. And with the increasing global environmental issues that arise with the globalization, people are now increasingly aware of the effects of the continuous industrialization. Another factor is , companies such as GAP wherein it has numerous employees will have a hard time obtaining more employees, the retirement of employees is rapidly getting
higher while the replacement does not increase.

Demographics are essentially population characteristics. It is the statistics on individuals in a region in terms of age, sex, marital status, income, ethnicity, and other personal

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attributes that may determine buying patterns. Understanding this basic information about a population can help a firm determine whether or not its products or service will appeal to customers and how many potential customers for these products or services might have Demographics Apparel retail sales are driven by demographic trends. Changing fashion trends among women and teens result in short product life cycles. Age distribution, ethnicity, gender, and priorities force retailers to establish a narrow target market, stressing the importance of brand recognition. The population increased by 13 percent in the United States. 75.1 percent of the nations 284.1 million people are White compared to 12.5 percent Hispanic or Latino, and 12.3 percent Black or African American. Educational attainment of the population 25 years and over for the United States is up. 75 percent had earned a high school diploma or more, and 20.3 percent had earned a bachelors degree or more. Of the 284.1 million people, 143.4 million were female and 138.1 million male Gap Inc. does not discriminate on individuals, the company carters to women and men of all ages and all types of different nationalities. Gap Inc. targets individuals all income brackets throughout the United States and internationally. Another, one of Gaps strategies is to divide their customers and potential consumers into age categories. Gap and GapBody target their products to the baby boomer generation that make up 77 million Americans. The baby boomers consist of people born between 1946 through 1964. Gap, GapBody and Gap Maternity target their products to generation x that make up 45 million people born between 1965 through 1976. Gap, GapBody and GapKids target their products to generation y that make up 25% of the population born between 1997 through 1994. GapKids and BabyGap target their products to children younger than five years of age. For GAP Inc.:

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Gap Inc. operates throughout the United States and in foreign countries, which helps them gain a competitive advantage in the industry in the specialty retail industry. Increase in individual fashion raises required product diversity. Ongoing aging of Baby Boomer population implies new, older and affluent market. Trend towards professional appearing garb

C- Task Environment Forces drive industry competition (Porters 5 forces) Industry Overview The U.S retail industry has been through challenging times during the past two years due to the financial crisis. As per the U.S. Census Bureau annual report, the total amount of sales for the U.S. retail industry was $14.3 trillion in 2009. It was the second consecutive (annual) dip in retail sales, which are both the cause and effect of the U.S. economic recession. U.S. retailers (and other industries) have stayed afloat for the time being via cost-cutting measures and layoffs. Thus, when demand improved marginally, profits rebounded. In 2009, holiday-season sales rose by 1.1% beating the forecasted -1.0% by the National Retail Federation, compared to a dismal 2008 when sales declined by 3.4%. Major multi-store organizations witnessed a decrease in their sales in the first half of 2009, but marginal improvements were observed during the latter half of the year, which extended into early 2010. However, consumers are expected to spend frugally, with the focus on value (for the money). In early 2010, the NRF forecasted U.S. retail sales to rise 2.5% in 2010 based on the fact that the recovering housing industry and reviving job market would bolster consumer confidence. This appears to be an optimistic forecast in our opinion. The forecast looked reasonable early on as U.S. consumer confidence ticked up in Q4 and Q1, rising to its highest level since September, 2008.

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Even if the 2.5% figure is reached, it would (excluding 2008- 2009) be the lowest since 1995. As many economists and analysts have stated in recent months, the return to prerecession levels will be slow. The International Council of Shopping Centers (ICSC) expects a gain in shopping-center-related sales of 1.2% in 2010 following a decline of 2.4% in 2009. The apparel retail industry leaders have developed diversified products and offer a variety of options to consumers to respond to the changing and unpredictable fashion trends. The current trend toward value-line clothing is shifting to more expensive lines as the economy recovers from the previous recession. There is also a shift toward greener initiatives. Companies are finding ways to reduce waste and manage sustainable energy consumption, exemplifying corporate social responsibility to add value to products. Health and wellness are another demographic trend, which is a driver behind athletic apparel.

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1. Threat of New Entrance The clothing retail industry is very competitive with a high number of competitors. This large number of competitors creates strong earnings potential compared to other industries. The industry is characterized by emphasizing differentiation and not cost leadership, which results in the firms not having to have a price war. Along with differentiation, most of the competitors within this industry tend to rely on their brand image. The threat of new competitors is relatively low due to the high start up costs of entering the market. Since Gap Inc. and other firms in this industry tend to have a high quality brand image, most firms have power over their suppliers, due to manufacturers competing for business. 2. Bargaining power of Buyers The specialty retail industry bargaining power of buyers is high because consumers have the option of either spending money at lower price discount retailers or high price discount retailers. Consumer Price Index The Consumer Price Index measures the changes in the prices of goods and services over time and is the primary measure of inflation. The CPI has grown annually since 1955; however, the CPI decreased by .32% as a result of the recession. This deflationary period was short lived and the CPI rose by 2.2% in 2010. Now that the recession is over, consumers can expect to see prices continue to rise, which will increase revenues for many companies. Many apparel retail companies diversify their product mix by providing cheaper alternatives for individuals whose purchasing power will be affected by rising prices. Consumer Sentiment Index The consumer sentiment index is a measure the consumers confidence about the general state of the economy. It is also an important indicator of a households general expenditures.

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When the consumer sentiment index is low, consumers are cautious to spend disposable income on discretionary goods and will focus more on maximizing value. When the consumer sentiment index is high, consumers are more willing to spend money on discretionary items such as higher-end clothing and accessories. We predict the consumer sentiment index to increase during the next 2 years. This is a positive indicator for the apparel retail industry and as consumer sentiment recovers, demand for discretionary items will return, fueling modest growth. Rapidly changing fashion desires for core demographics leads buyers to trendy brands The buyer power is very strong in the casual clothing industry. Their buyer power is crucial, and has a deliberate impact on the industry itself. Gap Inc. and its consumers have a discreet mutual arrangement regarding the aspect of buyer power. The company itself empowers its consumers to augment their buyer power due to the fact that Gap Inc makes its products suitably priced and affordable for all classes of people. The casual apparel industry has a market condition, in which the buyer (consumers) has a say on the price. This is relative as well for a company like Gap Inc. 3. Bargaining power of Suppliers The specialty retail industry bargaining power of suppliers is high in the specialty retail industry because many companies like Gap outsource their producers from foreign countries to save on manufacturing cost. The apparel retail industry consists of all mens wear, womens wear, and childrens wear. The key suppliers for the industry are clothing manufacturers and wholesalers. The fluctuations in the cost of power, dyes, chemicals, and cotton have strengthened supplier power in an industry that relies heavily on the availability of raw materials. Companies in the industry produce apparel in domestic and foreign factories, with more than 80% of industry inputs sourced from international suppliers

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Purchasing cost of materials is the largest expense of the industry, accounting for 65.8% of industry revenue. Clothes sourced from low-cost overseas manufacturers account for 8392% of the industrys domestic demand. 4. Threat of Substitute products The specialty retail industry threat of substitute is high because there is always new trend causing the average American to shift to other brands or the imitated cloth. This would cost less than the designers clothing that you will find in the stores, saving the consumer a lot of money and differentiate them from others. Consumers are willing to spend on fashionable items and higher priced clothing during times of prosperity but cut back on spending during a recession. Many apparel retailers had increasing inventory from the recession and were forced to discount and sell their inventories because consumers were reluctant to spend on discretionary items like clothing. The apparent threat of alternative or substitute products is a common adversity for Gap Inc. A number of casual apparel companies have always attempted to overwhelm Gap Inc.'s market share through attempts in cheaper price movements in for consumers to consider other brands aside from Gap Inc. The subject of price elasticity emerges whenever the price change of an alternative product affects as the demand for such product. The industry where Gap thrives is saturated by a bevy of substitute products, which to tend to constrained the ability of these companies to make an increase in prices. The casual apparel industry is always sporadic and innovative in terms of manufacturing products, which can entice consumers to patronize their products. This results to a letdown in sales for Gap Inc. 5. Rivalry among competing firms The apparel retail industry is a mature industry with a cyclical business cycle. The industry is saturated with competitors and established brands. While mature companies revenue should grow at the same rate as GDP, this growth did not occur in 2008-2009. Falling profits and wages due to the recession caused slow growth. GDP is forecasted to increase during

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the next few years, which will increase profit margins for companies operating in the apparel retail industry. The Gap, Inc.s large product line and distribution exposes Gap to intense competition. Gap competes with local and national department stores, specialty and discount store chains, independent retail stores, and online businesses that market similar lines of merchandise. To be successful, brand recognition is vital. The closest competitors relative to The Gap, Inc. include Levi Strauss & Co., TJX Companies Inc., Urban Outfitters Inc., and J. Crew Group, Inc. Gaps competitors for apparel, accessories, and personal care products are such famous American brands as DKNY, Polo Ralph Lauren, and Tommy Hilfiger. Those companies are manufacturing similar products, although they are targeting a slightly different customer market. These industries differ slightly because these fashion companies sell their clothing to department stores like Dillards, while Gap Inc. operates their own stores. They compete with these companies because switching costs are so low. Gap however has to take a lot of effort to stay aloof among them with pricing policies, quality and design in order to retain their customers and try to gain new ones. The external threat from the new entries is a minor one because of number of reasons. The clothing/accessories market is quite difficult to enter, and it takes time to establish a brand name and gain customer loyalty and trust, so in this instance Gap is almost safe at least for some time. Abercrombie and Fitch, American Eagle, and Buckle are some of Gaps competitors within the industry. They all aim to design their clothing around the younger crowds, ages 18-35. Gap Inc. has separated itself from its competitors in the industry by claiming a huge portion of the market share. This can be seen by the huge Net Income compared to industry competitors. Gap aims to sell to the whole family with a cost-leading attitude. 2- Key Success Factors Every firm in America has to decide, when it first starts, how it wants to position itself in the industry. Our firm, Gap Inc., is no different. Gap had to make the decision of how it wanted to gain a competitive advantage over other firms in its field. There are two strategies a firm can

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follow. It can either choose a cost leadership plan or a differentiation plan. Cost leadership is essentially just competing with other firms only on cost. A cost leader can offer the same product as a competitor, only at a lower price. Differentiation on the other hand is competing by offering a product that is different in some way. These plans are important because a firm can gain an advantage over its competitors based on either of these strategies. It is also important that a firm choose one or the other and not get stuck in the middle. Not taking one side or the other can cause a firm to earn low profits. The objective of product differentiation is to develop a position that potential customers will understand to be unique. There are two mechanisms for which differentiation affects performance. First, differentiation will reduce price sensitivity. This means that consumers might be willing to pay a higher price for the differentiating factor(s). Second, differentiation should reduce directness of competition. This can be defined by stating that the more your product differs from the industrys products, categorization becomes more difficult thus your product draws fewer comparisons to competition. At the market level, differentiation can be defined as improving the quality of goods over time due to innovation. In an evolutionary sense, differentiation is more of a strategy that is important in adapting to a moving environment and its social groups. Since almost all the firms in our industry have name recognition, success in this market must be achieved by adapting to a moving environment that is obsessed with the latest trends, while producing comfortable and casual styles of dress.

Opportunities Expanding presence in key growth markets The company has been expanding its international presence in various developing nations. In August 2011, the company signed a franchise agreement with Komax, for the exclusive rights to operate Gap brand stores in Chile. According to industry estimates, retail sales grew by 15.9% in 2010 in Chile amidst robust macroeconomic growth and strong demand. The sector continued to perform well in the first quarter of 2011. High consumer spending power, well developed

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physical infrastructure and a business-friendly regulatory environment are key factors behind the growing Chilean retail sales. Gap also opened its first four wholly owned contemporarily designed Gap stores in China in August 2011. Each of these four stores will offer all Gap collections including Gap, GapKids, babyGap and GapBody. An online retail store,, was also launched in China in the same month. The fast pace economic development in China (Gross Domestic Product or GDP growth of 10.3% in fiscal year 2010 and 9.2% in fiscal year 2009) coupled with the rise of the middle class income group and their increasing disposable income have further pushed up the demand for several consumer goods. According to the National Bureau of Statistics, the retail sales in China increased by 18.4% year-on-year in 2010 to CNY15.4 trillion (approximately $2.3 trillion). The countrys retail sales are expected to increase by 15% and exceed CHY17 trillion (approximately $2.6 trillion) in 2011. The positive trends and robust growth rates in the developing countries would lend pace to Gaps revenue growth as China and Chile contribute a higher proportion to the companys overall sales in the coming years. Growing market for plus size apparel for women in the US and the UK The market for womens plus size apparel (womens wear of size 14 or more in the US and 16 and above in the UK) has grown substantially in the past few years. According to the industry estimates, the plus size apparel market in the US (worth $26 billion) accounted for 27% of the entire clothing market in 2000. This market grew to $42 billion in 2009 and accounted for 54% of the total clothing market in the US. The growing proportion of customers falling in the plus size category is expected to further drive the market. It is estimated that 12 million women in the age group 1834, 20 million in the age group of 3554, and 21 million aged 55 and older buy plus-size clothes in the US. According to the National Center for Health Statistics, 60% of the women and over two-third of the adult population in the US is overweight. The overall apparel market in the US is expected to grow by 3.4% in 2012.

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In the UK, the plus size market represents 23.2% of the womens wear market, up from 18.7% in 2006, according to Verdict. Obesity levels have fuelled market growth with more retailers offering a wider range of sizes and fit. This trend is expected to continue as obesity levels rise further and retailers improve on their plus size product offers. The plus size sub sector is estimated to grow by 6% in 2011, outperforming the UK womens wear market by 1.4 percentage points. Though the demand for plus size apparel is growing, the market remains underserved with few retailers offering plus size clothing. Gap offers a variety of apparel in the plus size category under its brand Old Navy. Thus, by leveraging its offerings in the plus size apparel category, Gap can tap the growing plus size market in the US and UK and strengthen its customer base. Positive trends in the online channel The e-commerce platform has been rising at a fast pace globally. Online channel has been growing in popularity as the most preferred channel for several customers. Internet as a retail channel kept its popularity even during the economic recession as it offers several counter recessionary characteristics such as low operational costs which can be passed on to the consumers. As the economy improves and broadband connectivity increases, consumers across Europe and the US would continue to look to the web for purchasing because of the benefits they find in using this channel. According to the industry experts, online sales in Europe grew by 19% in 2010 and reached E172 billion (approximately $228 billion). Online sales accounted for nearly 6% of Europes overall retail trade in 2010.The online retail market in Europe is expected to reach E203 billion (approximately $270 billion) by the end of 2011, representing an increase of 18% over 2010; it is estimated to account for nearly 7% of the total European retail spending in 2011. Online retail sales in US will grow at a 10% average annual growth rate from 2010 to 2015 in the US to reach $278.9 billion in 2015, according to industry estimates. Online retail sales are estimated to reach $197.3 billion in 2011, an increase of 11.9% over 2010. The online shopping activity is increasing becoming popular in China. According to industry estimates, the online

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retail sales in China increased 22% in 2010 with the consumers increasingly turning to low cost products and convenience shopping. The number of online shoppers increased to 158 million in 2010 compared with 121 million in 2009, and consumer online spending almost doubled to CNY513.1 billion in 2010 compared to the previous year. Internet sales in the country touched CNY4.5 trillion (approximately $684 billion) in 2010. With the consumer online spending accounting for about 3% of total retail sales in the country, there is a huge room for growth in online retailing. Besides the brick and mortar format, Gap also has presence in various countries through its online retail websites. The company operates online business through its sites,,,, and Gap offers international shipping on its e-commerce site to 90 countries, including Australia, Brazil and Mexico. In 2008, the company launched an online shopping feature, Universality. The tool Universality allows customers to shop all four Gap brands namely, Gap, Banana Republic, Old Navy and Piperlime at one time, at flat shipping charge of $7. Though orders from Piperlime are shipped separately, customers are not required to pay extra charge for it. These value added services in addition to wide spread online reach would enable Gap to attract increasing number of customers who seek convenience in their shopping experience. Threats Weak consumer spending in Europe and the US Europe and the US are Gaps two key markets. In FY2010, the company derived 84.3% of its revenue from these markets. The weak economic conditions in these markets can adversely affect the companys top line growth. According to Eurostat, the volume of retail trade decreased by 0.1% in the Euro Area (Euro Area or EA includes Belgium, Germany, Estonia, Ireland, Greece, Spain, France, Italy, Cyprus, Luxembourg, Malta, the Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland) in February 2011 compared to the previous month. Additionally, the volume of retail trade for textiles, clothing and footwear in EA decreased by 0.7% in January 2011 compared to January 2010 figures. High rate of unemployment in the EA

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has been one of the key reasons for low retail spending by customers. The seasonally-adjusted unemployment rate in the European area was 9.9 % in February 2011, compared with 10% in the previous month and 10% in February 2009. High unemployment rate across EA and likely muted wage growth is expected to adversely affect consumer demand. The US market is also registering subdued consumer spending. Weak employment scenario coupled with tight financial market has considerably reduced the consumption expenditure in the country. The unemployment rate in the US remained high at 9.4% towards the end of 2010. Though the unemployment rate reduced to 9% in January 2011 and 8.9% in February 2011, it still is significantly high. High unemployment affects consumer spending as the consumers feel unsecured about the future income prospects. Personal consumption expenditure which accounts for over 70% of the US gross domestic product (GDP) grew by only 1.7% in 2010 over 2009. The average personal savings rate increased to 5.8% in 2010 compared to 4.3% in 2009. Further, in January 2011, the personal consumption expenditure grew by only 0.2% over the previous month. The decrease in consumer spending came even when the personal income increased by 1% in January 2011 (it is the largest gain in income since May 2009) driven by extended income tax cuts. Further, the savings rate increased to 5.8% in January 2011, from 5.4% in December 2010. Thus, high unemployment rate, sluggish wage gains and credit crunch are all expected to keep consumers relatively cautious in both Europe as well as the US. This trend is anticipated to continue through 2011 due to the inclination of people to save most of their income to reconstruct savings and wealth. Shoppers are expected to remain value-oriented in the near future. Thus, high unemployment rate and low consumer spending can negatively impact the sales revenue of companys upscale brands such as Gap, Banana Republic and Piperlime. High input cost can pressurize Gaps margins

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Gaps profit margins and top line growth may be adversely affected due to the rising prices of cotton, one of the key raw materials used by the company. Increasing cotton prices are adding to the cost of apparel manufacturing thus rendering the end product more expensive. The New York futures contract for cotton for March 2011 delivery increased to 169 cents per pound in January 2011 from 77 cents per pound in August 2010. Additionally, the cotton futures for May 2011 opened at $2.1 per pound in February 2011. Rising cotton prices have been pressurizing the clothing manufacturers and retailers to raise prices in a scenario where the consumers are tightening their purse strings. The shortfall in the supply of cotton has been a key reason for the rising global cotton prices. The consumption of cotton decreased significantly in 2008 and 2009. This was primarily due to financial crisis wherein many customers reduced their consumption expenditure. Following low demand for the commodity, many cotton producers reduced their planted areas for the following season. According to the industry estimates, China's planted cotton acreage decreased by 14% year-on-year and reached 5 million hectares during 200910. The countrys cotton output decreased by 15% to 6.4 million tons. Thus, as the sales of textiles and related finished goods started to recover, producers were unable to meet demand on time. Additionally, unfavorable weather conditions also contributed to low output in some of the key cotton growing countries. In 2010, China's main cotton planting areas namely, Xinjiang, provinces of Gansu, Shandong, Hebei and Henan, suffered from heavy snow and frost which in turn resulted in low yields. Furthermore, the output of cotton from Pakistan and Australia, two other key cotton producing nations, was severely affected due to floods that both the nations suffered in 2010. Therefore, as the cotton prices rise, Gap could be required to raise the prices of its merchandise or slim down its profit margins. An increase in price could draw away the customers who have already cut their spending amidst weak employment scenario and credit crunch. Growing market for imitated products

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Existence of counterfeit goods and accessories has proliferated in the US. Some of the major factors that led to an increased trade in counterfeit products include growing internet usage, extension of international supply chains and more recently, the global economic downturn that led customers to look for low cost alternatives. Designer sunglasses, footwear, watches, handbags and branded T-shirts are some of the most counterfeited goods present in the market. Local flea markets have also become popular destinations to buy counterfeit products as they offer recession strapped consumers, counterfeit products of popular brands at discounted prices. According to the industry estimates, the US economy suffers a minimum loss of $200 billion in revenue and 750,000 jobs annually from the sale of counterfeit goods. In Europe, the market for counterfeit products is estimated to be worth $8.2 billion. Rampant existence of counterfeit products poses a major problem to manufacturers as well as retailers of branded goods. Widespread counterfeiting reduces the exclusivity of the companys products. Counterfeits not only deprive Gap of revenues, but also dilute its exclusivity and brand image.

Conclusions The specialty apparel industry is facing increasing competition and market segmentation, while costs to expand remain high.

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D- External Factors Analysis Summary (EFAS). Table 3 EFAS table
External Factors Opportunities Growth in online retail spending Franchising agreements Global new market in Europe and China Growing market for plus size apparel for women in the US and the UK Anticipation of fashion trends and changing consumer preferences The market for prime real estate is competitive Threats Economic downturn directly affect apparel retail business Global specialty apparel retail industry is highly competitive Emerging fast fashion retailers 0.04 0.05 0.08 0.03 0.09 0.09 3 3 2 2 4 4 0.12 0.15 0.16 0.06 0.36 0.36 0.11 0.09 0.09 0.06 0.04 0.03 4 4 4 3 3 2 0.44 0.36 0.36 0.18 0.12 0.06 Weight Rating Weighted score Comments


11.3% average annual growth rate during

Many companies have experienced to misjudge the market. The location of GAP stores is a key factor of its strategy.

J. crew, Abercrombie & Fitch, Urban Outfitters, etc H&M, Forever21, Inditex(Zara), Primark, Zara

Industry consolidation Labor costs in China are estimated to increase High input cost can pressurize Gaps margin Economic problems in Europe

10 20% increase based on researches



Unemployment; will hinder the Europeans consumer spending and have a negative impact on apparel sales.

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Growing products market for imitated 0.06 3 0.18


Concerns about inflation in China. Total Scores

0.09 1.00

0.36 3.32

On April 17th, 2011, Chinas central bank- Chinas rapid economic growth.

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4. Internal Environment: Strengths and Weaknesses (SWOT) A. Corporate Structure. Gap Inc. is more of a flat structure than a tall structure. This is because Gap Inc. only features two levels of management. Since it is a flat structure organization, it has a wide span of control for the top level management, Glenn Murphy. This would also benefit the firm since this way communications are easier in between employers and employees. GAP Inc. has used a variety mix in building its base of structure for the firm. For example, it divides its structure based on its product, HR and Finance. We see that they separated the HR and the finance sector out as a separate department. I think that this would be a good decision for GAP Inc. since finance and its accounts would be more organized by grouping them all together in a group to calculate and departments can be compared easily by the statistics. But I would suggest that the firm should put the Human Resource department into each subordinate department like the marketing, below the CEO. This is because each department may have different styles of staff and it is best for the HR department to truly understand the employees when making HR decisions. Therefore, it would benefit the company if the HR went into the other product-based departments. Additionally, the company divided its subordinates as product base with brands that are under GAP (Banana Republic and Old Navy etc.) and GAP itself (North America). These product based departments resemble somewhat of a matrix structure of a firm because the multi-skilled people from different knowledge backgrounds get together to create the final product for the brand. GAP Inc. is a decentralized company. Although we could only see a few members in the organizational structure, we know that the ones at the second level of managements are all head of a department of brand. Therefore, it is obvious to do not have daily decision making often put on in the highest levels of hierarchy. Supporting activities includes the following components: company infrastructure, information systems, materials management, and human resource.

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Gaps internal structure was organized to support the company's goal of specific identities for each of the clothing-brand lines (Gap, Banana Republic and Old Navy). Each brand was established as a subsidiary/division of Gap Inc., and was charged with maintaining complete control of its product through a highly vertically-integrated corporate structure. In 1991, Gap established an International unit. While the division was treated as a profit center, it was a channel-based division, rather than a brand division.

B. Corporate Culture.
Adopts Results-Only Work Environment Strategy

Art Peck, president of Gap Outlet, a division of Gap Inc., in San Francisco, no longer hears about employees doctors appointments or parent-teacher conferences. And he couldnt be happier. For the past year, Gap Outlet has piloted a Results-Only Work Environment (ROWE), the first major company to do so since Best Buy pioneered the practice six years ago. The pilot program included 137 headquarters employees and executives in merchandising, design, production, finance, HR and IT. Retail store employees are not eligible to participate. ROWE is a corporate culture initiative designed to significantly improve employee productivity, accountability and engagement. Under a ROWE, employees are empowered to work whenever and wherever they want as long as the work gets done. Rationale for Initiative Eric Severson, vice president of HR, believed the culture and the demographics at Gap Outlet were primed for a solution like ROWE. We are in one of the worst commute cities and in one of the most expensive places to live, he explained. We have a 76 percent female workforce with an average age of 34. The organizational structure at Gap Outlet is flat and lean, and the culture is entrepreneurial even after 14 years. Jobs are large in scope, and people have a lot of autonomy and empowerment, he said.

GAPs Inc.


The downside to all this entrepreneurial *spirit+ and empowerment is burnout, said Severson. So work is fun and challenging, but work/life balance was terrible and turnover was high. People in exit interviews would say to us, I love my job, but its just not worth it anymore. We were spending years investing in female leaders only to lose them after maternity leave because they couldnt figure out how to swing both work and family. Thats bad news for a retail organization with intense global competition and a weakened economy. In our business, merchandisers spend years developing expertise and the gut instinct to predict fashion trends, added Severson. To see that knowledge and talent walk out the door is devastating. Leap of Faith In 2004, Gap Outlet engaged in a multiyear strategy to remedy its work/life balance issues. HR started with no-meeting Friday afternoons, seminars on conducting meetings effectively, work/life balance tools and distributed laptops so people could work from home. Work/life balance scores inched up year by year to 72 percentstill lower than other divisions in Gap Inc. Severson believed that to reach the next level of an innovative work culture he would have to do something more radical. He had heard about the Best Buy experiment, which also excludes retail store workers, and its results and believed it was time to test it out on a team at Gap Outlet Much of what shaped the company at its founding in 1969 remains deep in their DNA today: customer focus, community involvement and integrity. Their vision for how they work is built on four pillars: Think: customers first They consider the needs and value the diversity of thought, experience and perspectives among their customers. Inspire: creativity they open themselves to new ideas, tapping into their diversity of perspectives. Do: whats right they treat every customer, supplier and employee with respect.

GAPs Inc.


Deliver: results they strive to create an inclusive environment where employees thrive and generate top performance. These cultural cornerstones are the filter for their decisions and behaviors. And they sum it all up in three words: Wear your passion. Wear Your Passion is the cultural foundation that links all of their brands, divisions and functions. It encompasses their goal of fostering a culture that retains the essence of what makes them special and focuses on how they need to evolve to succeed. Recent Employee Opinion Survey results showed 88 percent of their 100,000-plus respondents agreed with the statement, I understand and believe in our Wear Your Passion cultural values. Checking in, all over the world Their employees bring their culture to life so each of the last five years, they have reached out to nearly all of them and asked them to share their thoughts via their anonymous Employee Opinion Survey. The survey is translated into seven languages, and its clearly reaching far and wide. In 2009 and 2010, participation rates were 87 and 83 percent, respectively. The 2010 survey results demonstrated the impact of employees belief in the company and their engagement. Scores indicate that employees firmly believe in Gap Inc.s vision and values. Culture without borders Their culture was front and center as they celebrated a historic moment and amazing milestone in 2010: the opening of their first stores in China. Located in Shanghai and Beijing, the stores are company-owned and operated, which allowed them to share their culture and heritage with the China employees and customers. All recruiting materials included Wear Your Passion, the content for the countrys all-employee meeting was structured

GAPs Inc.


around the four pillars of their culture, and employees received T-shirts and bracelets with Wear Your Passion translated in English and Chinese. Honoring our principles As part of a continued effort to recognize the importance of their culture, they created the Fisher Awards in 2010 to highlight the four core principles founders Doris and Don Fisher built the company around: innovation, integrity, and community & store excellence. The Fisher Award honors employees worldwide who carry on those traditions and truly wear their passion for their values and their company. C. Corporate resources.

Marketing and Sales The marketing and sales component in a company involves promoting the product or service effectively and setting the selling price. Gap Inc. uses all types of marketing strategies to promote and inform people of their products. Gap Inc. method of advertising their products is through TV and printed ads. Gap has all types of commercials for different seasons, holidays and activities that they use to attract customers. Another marketing strategy Gap use is ads like: magazines, newspapers, and billboards. Gap marketing team works with top magazine companies to run ads in major magazines ads like Vogue, ESPN, and Rolling Stone. Gap also works with major newspaper companies worldwide to run ads to attract customers. They also use billboards, walls, and posters to promote the company products throughout the United States, Canada, Europe and Japan. Gap Inc. other

marketing strategy is using internet pop-ups on popular sites to promote their company on the internet. Maintaining favorable brand recognition and effectively marketing products to consumers in several diverse market segments an established brand is critical to success in an industry that is mature and saturated like the apparel retail industry. Furthermore, the key to success in this industry is a diversified product mix, allowing consumers to remain brand loyal regardless of the current economic state.

GAPs Inc.


The Gap, Inc. operates through two business divisions: stores and direct. The company has five different divisions that offer a variety of selection for its consumers. Gap offers its consumers apparel at moderate price points: including wardrobe basics, accessories, and personal care products for men, women, and children. Old Navy addresses the market for value-priced family apparel. Banana Republic offers fashionable apparel at higher prices than Gap. Athleta offers performance-driven apparel and footwear for women, with Piperlime addressing stylistic fashions that include accessories, handbags, and other specialty items for men, women, and children. The direct segments are the online catalogs of each retail company, offering a wider selection often at lower prices. Marketing Mix Featuring a broad selection of low-priced blue jeans and records, Fisher's store was the first of what would become a massive chain of stores. After fine-tuning his concept, Fisher expanded remarkably quickly, creating a $100 million, 200-store chain spread across more than 20 states by the mid-1970s. By the end of the decade, the publicly traded chain, which was growing by as many as 80 stores each year, was generating more than $300 million in sales. Product In the beginning Gap was selling only Levis products where they have to depend on that particular brand by and large. Later on when they realized depending too much on a particular product may harm the business in the future, they have changed their course of depending on a single particular product .Gradually they have came up with their own product name and different supplier in order to reduce risks. The Gap was bound for success early on because the utility of its product mix was perfect for a specific market segment. The Gap offered a classic line of khaki pants and cotton button-down shirts, perfect for the new "business-casual" look, and gained great brand recognition as a result.

GAPs Inc.


Not long after, in 1976, The Gap went public. With the new wealth the company was enjoying, it further strengthened its share in the market by continuing to expand its product mix and add new stores across the world. Old Navy led the way for us in sales growth. The team kept a keen focus on its target customers, whom we refer to as Jennie, Mike and the kids. Across every department, Old Navy worked hard to make sure that decisions were made with this target family clearly in mind. As a result, Old Navy was able to deliver fashion at a great value for the entire family. The strategy is paying off; the business delivered six months of positive comps in the back half of 2009. As a result of our commitment to constant consumer research, Gap reinvented one of the product categories linked to our heritage: denim. This led to the brands successful 1969 Premium Jeans collection. Our customers responded positively because of our perfect combination of style, fit, quality and price. Were now expanding the 1969 product line to kids and baby, and will continue to work this formula in refreshing other key product categories. Banana Republic heard from consumers that versatility was paramount and responded by adjusting its product and marketing in the second half of the year to showcase that it can be worn seven days a weekfor work, weekend or going out.

GAPs Inc.


Life Cycle Gap Inc. is currently operating in the shakeout stage of the life cycle. Gaps growth rate is beginning to slow down and the companys products are beginning to become saturated.

Place Gap's main opportunity to reach its customer is through its stores. Gap operates stores in the United States, Canada, the United Kingdom, France, Ireland, Korea, Japan and China. The Gap, Inc. also has franchise agreements with unaffiliated franchisees to operate Gap or Banana Republic stores in Philippine, Singapore, Malaysia, United Arab Emirates, Korea, Kuwait, Qatar, Bahrain, Oman, Saudi Arabia, Cambodia, Indonesia and Mexico. As of February 3, 2007, The Gap, Inc. operates a total of 3,131 store locations.[36] In January 2008, Gap signed a deal with Marinopoulos Group to open Gap and Banana Republic stores in Greece, Romania, Bulgaria, Cyprus and Croatia. In February 2009, Elbit Imaging, Ltd. secured a franchise to open and operate Gap and Banana Republic stores in Israel. In August 2010

GAPs Inc.


GAP opened its first store in Melbourne, Australia at Chadstone Shopping Centre. In September 2011, Komax opened the first GAP store in Chile, due to a franchise. In October 2011, the first GAP store opened in Warsaw, Poland. Total: Over 3,200 stores worldwide. Company-operated locations: About 3,000 stores across the United States, United Kingdom, Canada, China, France, Ireland, Japan and Italy. The first Gap store outside the United States opened in the UK in 1987 Franchise: About 200 stores in locations across Asia, Australia, Eastern Europe, Latin America, the Middle East and Africa. Gap has about 10 miles of storefront windows around the world. The company just reported that it would close 60 underperforming stores this year and up to 50 more next year. The Gap expects to close 110 stores in 2010 alone, opening another 65 in total 15 and 10 of those stores being Old Navy and Gap stores respectively and 35 of those stores opening internationally. Distribution Centers Total: 12 United States: 9 Canada: 1 United Kingdom: 1 Japan: 1 Online Customers in more than 90 countries can order from our brands U.S.-based websites, and those in China, Canada and the UK are served by dedicated websites. The domain attracts over 18 million visitors annually.

GAPs Inc.
Promotion Public figures in ad campaigns


Gap frequently features public figures in its print and television advertisements. They have featured over 308 celebrities of various statures in their campaigns. Their commercials featuring songs such as "Lovely Day" remain some of the most successful and memorable usages of television advertising in history. Attempt to introduce a new logo

The new logo lasted for a week On October 6, 2010, Gap debuted a new logo in an attempt to create a more contemporary presence in the retail market. The new logo was made with Helvetica typeface and did away with the blue box that had become iconic with the brand. There was a public outcry against the new logo, especially in the graphic design community. The company returned to its previous "blue box" logo on October 12, only a week after the new logo's debut.[52][53] Marka Hansen, the executive who oversaw the logo change, resigned February 1, 2011.[54] Price Rising costs and a thriftier consumer together form a solid foundation for difficult times in the retail apparel industry. Management teams at these companies are pressing into the holiday season with caution in pricing, all too aware of the delicate balance they must keep between maintaining profit growth and attracting and retaining customers. The Gap, Inc. has also upheld that it has not been experiencing any cost pressures. As a whole, the company plans to continue promotional activity it has put in place over the past

GAPs Inc.


few quarters with more aggressive pricing coming during regular sales seasons or alongside steep competitor price cuts. From the end of 2007 through 2009, low-priced apparel stores outperformed higher-priced stores. The Gap Inc.s Old Navy saw greater growth in net sales per square foot than stores like Abercrombie & Fitch and Banana Republic which experienced severe declines. Finance The consolidated financial statement comparison shows that Gap, Inc. is financially and economically sound; although the company faced a decrement in net income between 2009 and 2012. Glenn: Gap Inc. has a solid financial framework. Maintaining cost discipline allowed us to invest in growth vehicles while still delivering on the bottom line. Going forward, were determined to achieve our goal of growing top line revenue. Its a top priority for the management team and paramount to our success. Sabrina Simmons, CFO: Our economic model remains strong, and we were disciplined in meeting our financial commitments. Earnings per share for 2010 improved by 19 percent, and we grew net sales by 3 percent. This year, while we invested more in the infrastructure for growth, we still achieved the highest operating margin in a decade: 13.4 percent. And were also pleased with our commitment to return cash to shareholders through share repurchases and dividends. In total, we distributed $2.2 billion in 2010. The strength and diversity of our portfolio of brands makes these results possible, and also allows us to successfully navigate changes in the marketplace. Toby Lenk, president of Gap Inc. Direct: Our division has benefited from some of the new investments mentioned above, and we understand the central role online plays in the companys business model. We continued to gain market share this year, through our large global online expansion and the encouraging results for Athleta and Piperlime. Were given the freedom to make investments for the long term, and its paying off. Were on track to double our revenue from about $1 billion in 2009 to $2 billion in 2014.

GAPs Inc.
Robust Margins; Strong Liquidity -- The liquidity position of the company is very strong.


As of July 31, 2010, cash & cash equivalents including short term investments at GPS amounted to $1.7 billion. The company can conveniently cover the year-to-date capital expenditures of $250 mln. On July 31, 2010, GPS was debt-free without any long-term debt obligations, further strengthening the liquidity position of the company. Management has repurchased 38,000,000 shares for $800 mln during the second quarter of 2010, and has further authorized repurchase worth $750 mln, thus relieving the company of its obligation to return excess cash to the shareholders. The size of these repurchases is quite significant relative to the GPS market capitalization. However, we expect the operational cash-flow to gradually trend down in the near- to medium-term, from $1.9 billion in FY09 to $1.6 billion in FY-12. Despite its struggle with managing top-line growth, GPS has managed its margins reasonably well, thanks to its tight expense controls. We expect GPS to maintain its gross margin at the current 40% level in the near- to medium-term. The EBITDA margin however may see a gradual decline from 17.4% in FY09 to 15% in FY-12. Reuters Consensus Estimates The mean consensus estimate for revenue is $14.49 billion and for EPS it is $1.80 for FY10. For FY11, the revenue estimate is $14.83 billion and EPS is $1.89. The shares are now trading at < 9X estimates for 2011. Stock and Market Trend Analysis Gap has been able to meet the investors expectation most of t h e t i m e s s i n c e i t s incorporation. It has been paying out regular d i v i d e n d s a n d t h e s t o c k t r e n d s h o w s t h a t t h e 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.

GAPs Inc.
Table 4: Financial Analysis Ratios
Ratio data TTM as of 01/28/2012


Profitability - gap inc/the (GPS) Return on Assets Industry Comparison


Return on Equity Industry Comparison


Return on Capital Industry Comparison


Margin Analysis - gap inc/the (GPS) Gross Margin Industry Comparison


Levered Free Cash Flow Margin Industry Comparison


EBITDA Margin Industry Comparison


SG&A Margin Industry Comparison


Asset Turnover - gap inc/the (GPS) Total Assets Turnover Industry Comparison


Accounts Receivables Turnover Industry Comparison

No data available

Fixed Assets Turnover Industry Comparison


Inventory Turnover Industry Comparison


Credit Ratios - gap inc/the (GPS) Current Ratio Industry Comparison Quick Ratio Industry Comparison



Long-Term Solvency - gap inc/the (GPS) Total Debt/Equity Industry Comparison


Total Liabilities/Total Assets Industry Comparison


Growth Over Prior Year - gap inc/the (GPS)

GAPs Inc.
Total Revenue Industry Comparison Tangible Book Value Industry Comparison




EBITDA Industry Comparison


Gross Profit Industry Comparison


Receivables Industry Comparison

No data available

Inventory Industry Comparison


Diluted EPS Before Extra Industry Comparison


Capital Expenditures Industry Comparison


Cash From Ops. Industry Comparison


Levered Free Cash Flow Industry Comparison


GAPs Inc.
Quarterly Earnings & Estimates - GAP INC/THE (GPS)


EPS - Earnings Per Share Pre Exceptional

Gap Inc.'s Quarterly Earnings Gap Inc. reported 4th quarter 2012 earnings of $0.44 per share on 02/23/2012.
Annual Earnings & Estimates - GAP INC/THE (GPS)

EPS - Earnings Per Share Pre Exceptional

Gap Inc.'s Annual Earnings Gap Inc. reported annual 2012 earnings of $1.56 per share on 02/23/2012.
Quarterly Revenues - GAP INC/THE (GPS)

Gap Inc.'s Quarterly Revenues Gap Inc. had 4th quarter 2012 revenues of $4.3B. This bettered the $4.3B consensus of the 28 analysts covering the company. This was 19.3% above the prior year's 4th quarter results.

GAPs Inc.
Annual Revenues - GAP INC/THE (GPS)


Gap Inc.'s Annual Revenues Gap Inc. had revenues for the full year 2012 of $14.5B. This was -0.8% below the prior year's results.

gap inc/the (GPS) Snapshot Open $24.89 Previous Close $25.00

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GPS:US Historical Stock Quote GPS:US Advanced Stock Chart

GAPs Inc.


Stock Ownership Guidelines for Directors We have adopted minimum stock ownership guidelines for our Directors. Each nonmanagement director should, within three years of joining the Board of Directors, hold stock of the Company worth at least three times the annual base retainer then in effect. Management directors are required to own stock of the Company in accordance with our stock ownership requirements for executives, described on page 45. Our insider trading policy prohibits speculation in Gap Inc. stock, including prohibiting short sales, and prohibits directors from entering into transactions intended to hedge their ownership interest in the Companys stock. The stock symbol and stock exchange for Gap Inc.: The ticker symbol is "GPS" listed on the NYSE stock exchange. The company competes in Retail and Family Clothing Stores.

GAPs Inc.


The company recorded revenues of $14,664 million during the financial year ended January 2011 (FY2011), an increase of 3.3% over FY2010.The operating profit of the company was $1,968 million in FY2011, an increase of 8.4% over FY2010. The net profit was $1,204 million in FY2011, an increase of 9.3% over FY2010. Sales for Gap have been steady over the last few years. However, their Net Sales/ Cash from Sales ratio has declined, meaning they have been getting less cash from sales. Net sales to accounts receivables were N/A due to the fact that the accounts receivable amounts for Gap Inc. were reported as immaterial. After analyzing Gaps accounting practices and policies were found to be fairly aggressive. However, their disclosure and reporting of relevant material is seemingly very transparent. Gap discloses all accounting methods concerning everything from leases and pension plans to inventory and tax methods. They also outline all accounting statements and opinions affecting their business. No distortions or discrepancies in their accounting. After computing the firms core ratios, Gaps overall performance as compared to its competitors within the industry became clearer. Inventory turnover tended to be lower while gross profit was lower throughout the industry. This is most likely due to the fact that most firms in the industry compete with differentiation and brand name. The Gaps key success factors are attributed to their strict accounting policies which coordinate with each other to create the present and future financial performance of the company. The financial statements are consolidated to include the accounts of the company and all its subsidiaries. All inter-company transactions and balances have been eliminated. Translation adjustments result from translating foreign subsidiaries financial statements into U.S. dollars. Balance sheet accounts are translated at exchange rates in effect at the balance sheet date. Income statement accounts are translated at average exchange rates during the year. The resulting translation adjustments are included in accumulated other comprehensive earnings in the Consolidated Statements of Shareholders Equity.

GAPs Inc.


Continuing to struggle with poor sales, Gap reported that net income for the first quarter ended April 30 fell 22.8 percent off a 3 percent decline in comparable-store sales. Quarterly profits declined to $233 million, or 40 cents a share, 1 cent above analysts' estimates, compared with $302 million, or 45 cents, for the year-ago quarter, and net sales declined 1 percent to $3.3 billion from $3.33 billion. Gap cited impact from the March earthquake and tsunami in Japan. We are disappointed in our quarterly performance, however remain invigorated by the opportunities ahead, said Glenn Murphy, Gap's chairman and chief executive officer. We're focused on making the necessary adjustments across the business to deliver the kind of sales we should expect from our brands. On the company call, Gap chief financial officer, Sabrina Simmons, acknowledged a miscalculation on the company's part. We had made the assumption *in February+ that our fall buys would be the most expensive, and that we'd get some easing in our holiday buys, she said. And it turns out we were just absolutely wrong on that assumption. Holiday got worse, and that costing came in much higher than we expected, and higher than fall. Across the industry, retailers are getting increasingly worried about sharp inflation from rising raw material, fuel and shipping costs, how to adjust their own prices on the selling floors and how consumers will react. The recovery from the recession that many have witnessed in recent months appears to be in jeopardy. By division, comparable-store sales, including online revenues, for the first quarter were down 3 percent at Gap North America, down 1 percent at Banana Republic North America and down 2 percent at Old Navy North America. International sales were down 6 percent. Results were reported after the close of the equity markets Thursday. Gap shares closed up 0.9 percent at $23.29 but fell more than 15 percent in the first 90 minutes of afterhours trading.

GAPs Inc.
Research and Development


Differentiation companies require heavy investments in research and development. At GAP Inc., each item is sold and then registered for analysis by planners and distribution analysts. These analysts monitor weekly sales trend reports and determine which stores need to be stocked with what products. These replenishment shipments usually occur one to three times per week. This process continues until the season ends. At this point, all customer feedback, performance notes, and suggested improvements are analyzed so GAP is ready to being this cycle again. The research and development in a company involves the product or service along with the actual development. Gap Incorporated preformed a study on the retail industry, to obtain the ability to provide their customer with a variety of clothing items, accessories and body care products.

Operations & Logistics Production The production in a company involves the creating the product or service within. Incorporated uses the outsourcing strategy to produce their products. specialize company to manufacture their products. The apparel industrys value chain consists of designing apparel, manufacturing and distributing garments, and marketing and merchandising them. Designing apparel involves creating clothes and accessories that are fashionable, trendy, and attractive before the definitions of those dimensions are known; it is a highly creative and uncertain process. Apparel firms take large risks when the chosen designs are converted into patterns, and the fabrics, colors, and accessories are itemized for ordering. These specifications help the designer or organization to develop and retain the required manufacturing capacity to deliver on the expected demand. Gap

Gap hires a

GAPs Inc.


The patterns and specifications are handed over to the factories who work with the upstream members of the supply chain to receive the fabrics and other materials. The garments are sewn according to the specifications and transported to a distribution center that ships it to the retail outlets or holds it for shipping if the garments are ordered on line. Sales are monitored to assure sufficient store inventories or in cases where demand exceeds the forecast, signal the need to produce additional garments. At the end of each season, the brands assess their performance, gather customer feedback, look for improvements, and begin the cycle all over again. Material Management The company material management component involves the moving of materials through the value chain. With Gap Inc. outsourcing their products, the company does not have to deal with moving their product through the value chain. Gap Inc. has the responsibility of making sure the distribution centers are equipped and have the capability to keep operational cost down. Customer Service The customer service component in a company involves providing assistance during and after the transaction. Gap Inc. provides their customer with a 1-800 number on each and every receipt from a transaction in order to assist customers with questions. Gap Inc. also offers their customers with a return option if the customer is unsatisfied with the item.

Human Resource The human resource component involves the hiring of qualified and skilled employees to carry out the company mission and goals. Gap Inc. human resource department hires individuals who are focused on the Gaps wellbeing and aspirations for the future. All director nominees must possess certain core competencies, some of which may include experience in retail, consumer products, international business/markets, real estate, store operations, logistics, product design, merchandising, marketing, general operations, strategy, human resources, technology, media or public relations, finance or accounting, or

GAPs Inc.


experience as a CEO or CFO. In addition to having one or more of these core competencies, Board member nominees are identified and considered on the basis of knowledge, experience, integrity, leadership, reputation, and ability to understand the Companys business. The Board believes that this diversity, including differences in backgrounds, qualifications, experiences, and personal characteristics, including gender and

ethnicity/race, is important to the effectiveness of the Boards oversight of the company. Accordingly, this diversity is a factor that is considered in the identification and recommendation of potential director candidates. All director nominees are pre-screened to ensure that each candidate has qualifications that complement the overall core competencies of the Board. The screening process also includes conducting a background evaluation and an independence determination. The Governance and Nominating Committee is also responsible for overseeing a formal evaluation process to assess the composition and performance of the Board, each committee, and each individual director on an annual basis. The assessment is conducted to identify opportunities for improvement and skill set needs, as well as to ensure that the Board, committees, and individual members have the appropriate blend of diverse experiences and backgrounds, and are effective and productive. As part of the process, each member completes a questionnaire that includes Board, committee and individual assessments. While results are aggregated and summarized for discussion purposes, individual responses are not attributed to any member and are kept confidential to ensure honest and candid feedback is received. The Committee discusses opportunities and agrees upon plans for improvement as appropriate and reports the results annually to the Board. A director will not be nominated for reelection unless it is affirmatively determined that he or she is substantially contributing to the overall effectiveness of the Board.

Information Systems

GAPs Inc.


The company information system component involves handling, tracking and maintaining company sales. Gap Inc. incorporated using bar codes and electronic interchange system. Gap uses theses systems to guarantee the company is operating efficiently and their products are being disturbed properly. The bar code systems provide the retailers with important information like: items sold sizes, and colors and the company manufacturers. The electronic interchange system helps managers manage inventories and allow suppliers and distributors to communicate electronically. The Gap is implementing technology into its stores which contain certain intrinsic competitive advantages which give the corporation a head up on the competition. Not only does this new technology allow for more cost effective distribution, but it also offers a more time-efficient experience for both the consumer and the employee. Instead of spending large amounts of money yearly by manually taking inventory, The GAP will now be able to access inventory data quickly and easily through a handheld device. If there is a situation where merchandise is out of stock at a particular location, it can be dealt with quickly and effectively, by communicating with other GAP stores to replenish the missing units. These measures taken to provide technological advantages over other companies will pay off, simply because it is a more convenient way of shopping. It literally bridges inventories from multiple stores in a region, giving the customer a larger selection of sizes and styles. This allows for customers to try on clothing at the store, as well as offer the large inventory the internet has been able to offer for many years. These new ways of business improves The GAP with an entirely different shopping experience. This experience in time will increase customer retention and rapport, generating profits.

Distinctive Competencies Gap Inc. achieved distinctive competencies by the companys brand recognition and name, good financial performance and website usage, to achieve a competitive advantage over the company rivals in the industry. Gap is known for producing high quality products, with fashionable colors that appeal to customer.

GAPs Inc.


GAPs Inc.
Internal Factors Analysis Summary (IFAS). Table 4: IFAS table for GAP Inc.
Internal Factors Strengths Large network of physical stores Building financial strength Global brand recognition Multiple brands and brand extensions for a wide range of segments Franchising system easily to expand Gap store internationally Huge customer and vendor base Well balanced portfolio of value as well as Low productivity of companys stores upscale brands Weaknesses Low productivity of companys stores Geographic concentration Bargaining power of Suppliers 0.10 0.09 3 4 0.30 0.36 0.10 0.06 0.07 0.05 0.05 0.03 0.05 5 4 4 4 4 3 3 0.50 0.24 0.28 0.20 0.20 0.09 0.15 Weight Rating Weighted score Comments


Strong margins compared to competitors



Less attractive in trendy clothing



Uncontrollable production processes High input cost

0.08 0.10

4 3

0.32 0.30

Decline in revenues remains heavily dependent on the US (over 83.6% of its revenues) 1000 vendors in 60 countries. 27 percent is produced in China. ( products shortage, shipment delay and increased costs). product lines are less attractive clothing to consumers than competitors Control of production processes is a key factor among fast fashion retailersChina can pressurize Gaps margins Old Navy and Banana Republic over Gap; indicate potential problems with the companies operating structures.

cannibalization of sales between Brands



Total Scores



GAPs Inc.


Analysis of strategic Factors (SWOT).

SWOT Analysis Strengths Global presence catalyzed by franchise and company-owned stores and online presence. Over the years, Gap has built a wide geographic presence spread across various countries. Gap primarily operates through company-owned stores, various franchise agreements and online retail websites. Gap runs its company-owned stores in the US, Canada, the UK, France, Ireland, Japan, China and Italy. At the end of FY2011, the company had 3,068 company-owned retail stores. Gap also has various franchise agreements with unaffiliated franchisees that operate Gap and Banana Republic stores in many countries including Australia, Bahrain, Bulgaria, Chile, Croatia, Cyprus, Egypt, Greece, Indonesia, Israel, Jordan, Kazakhstan, Kuwait, Malaysia, Mexico, Oman, Philippines, Qatar, Romania, Russia, Saudi Arabia, Singapore, South Korea, Thailand, Turkey, and UAE. Under the franchise agreements, third parties operate stores that sell apparel and related products under the companys brand names. At the end of FY2011, Gap had 178 franchise stores. Though franchise stores are a small part of the companys business, they play an important role in aiding Gaps efforts to expand internationally. Apart from the brick and mortar format, Gap also has presence in various countries through its online retail websites. The companys brand Gap was established online in 1997. The online retail websites for Banana Republic and Old Navy were launched for the US market in 1999 and 2000, respectively. Additionally, in 2010, the online retail facility for the brands Gap, Banana Republic and Old Navy was also made available in Canada, the UK and some other European nations. Gap also has a line of products under the brand Piperlime, exclusively offered through online-only stores. Beginning from 2010, Piperlime was made available in other select international countries. The companys products under the brand Athleta are also available for sale through online retail platform. Gap has been growing its online presence in various European nations, North America

GAPs Inc.


as well as many developing nations in the Asia-Pacific region. The company offers international shipping on its e-commerce site to 90 countries, including Australia, Brazil and Mexico. The companys three pronged strategy has allowed it to expand into various geographies. Wide spread presence broadens the companys customer base and diversifies business risk by decreasing dependence on the mature markets such as the US and the UK. Well balanced portfolio of value as well as upscale brands Gap has a well balanced portfolio of brands that helps the company to cater to separate groups of target customers including those who seek value or upscale brands or both. The companys brands Gap, Banana Republic and Piperlime cater to the high end customer segment. The Gap brand offers extensive range of classically styled, high quality, casual apparel at moderate price points. Additionally, under the brand Gap, the company also operates Gap Outlet stores. These stores offer similar categories of products as offered by Gap, however at lower price points. The companys brand Banana Republic, offers sophisticated and fashionable collection of casual and tailored apparel, shoes, accessories, and personal care products for men and women at price points higher than the brand Gap. The company also operates Banana Republic Factory Stores, which offer similar categories of products as Banana Republic, however, at lower price points. Additionally, the brand Piperlime by the company offers an assortment of the leading brands in the category of footwear, handbags, apparel, and jewelry for women and footwear for men and kids. The company also offers high quality women's sports and active apparel and footwear under the brand name Athleta. Gaps presence in the value apparel and accessories market is represented by its offerings under the brand name Old Navy. Old Navy is positioned as a value priced family apparel retailer. Across every department, Old Navy ensured that merchandise decisions were made with target family audience. As a result, the brand has been able to deliver fashion at value prices for the entire family. Family customers facilitate spending at multiple points and the value positioning is aiding the sales growth in tough economic times.

GAPs Inc.


Thus, with the help of various brands focused on serving separate target audience Gap has been able to penetrate different market segments. While the companys value brands help Gap to effectively cater to the increasing base of price sensitive customers, its upscale brands hold great potential as the US and European economies improve and customer spending increases. Strong margins compared to competitors Over the past few years, Gap has been able to maintain strong profit margins compared with its competitors. In FY2011, the companys operating margin was 13.4%. In comparison, the operating margin of Gaps key competitor AnnTaylor Stores was 6% for FY2011 (financial year ending January 2011), and for American Eagle Outfitters the operating profit margin was 10.7% (financial year ending January 2011).The companys net profit margin (8.2%) for FY2011 was nearly double when compared to the net profit margins of AnnTaylor Stores (3.7%) and American Eagle Outfitters (4.7%). Gap has undertaken several measures to enhance the companys profitability. During the most challenging economic times, the company has successfully grown margins every year since FY2007 with stringent inventory and cost control, streamlining the supply chain, successfully repositioning Old Navy and launching new product categories, such as denim, to spur demand. High levels of profitability provide a cushion to sustain low revenues. Additionally, higher profits compared to competitors would enable Gap to weather price competition effectively.

Weaknesses Dependence on outside merchandise vendors for supply of products Gap is completely dependent on outside merchandise vendors for sourcing its products. The company does not own any factories. Gap procures private label and non-private label merchandise from 1,020 vendors. Only 1% of the companys merchandise sold in FY2011 was produced in the US. The remaining 99% of the merchandise was produced in various other countries, with China being one of the largest suppliers. Complete dependence on outside vendors for merchandise procurement reduces Gaps control on the quality of the finished

GAPs Inc.


products. In the past, Gap has recalled some of its merchandise procured from China as well as Indonesia. In April 2010, the company recalled 6,500 swimsuits from the US market and about 480 from the Canadian market. The swimsuits marketed for children had halter straps that were manufactured too short causing the plastic ring located at the center of the swimsuit to press against the child's throat and obstruct the airway. Thus, the swimsuit posed a strangulation hazard to the child. Previously, in 2009, Gap recalled its Children's Coats as the coats had toggle fasteners that could break and detach from the coat, posing a choking hazard to young children. Thus, complete dependence on outside vendors for merchandise procurement makes Gap vulnerable to issues such as lack of quality which in turn can adversely affect the companys brand as well as demand for its products. Low productivity of companys stores The company has not been able to harness the worth of its real estate holdings to the fullest. Over the past few years, Gap has been witnessing low sales per average square foot, with a marginal increase in FY2011. The companys sales per average square foot decreased to $329 in FY2010 compared with $412 in FY2006, representing a compound annual rate of change (CARC) of 5% during FY200610. In FY2011, the companys sales per average square foot reached $342 representing a marginal increase of 3.9% over the previous year. In spite of an increase in FY2011, Gaps sales per average square foot remains below its peak. Real estate is one of the important assets for the company and low yields indicate that the company has not been able to efficiently utilize its resources. Thus, in the long run, low productivity can adversely impact Gaps profitability. Geographically concentrated operations The company relies heavily on the North American markets for its revenue generation. In fiscal year 2005, the North American market alone accounted for 90.7% of the companys total revenues. The remaining segments Europe and Asia contributed merely 5.4% and 3.6%

GAPs Inc.


respectively in fiscal 2005. Such a heavy reliance on this market exposes the company to market concentration risks. In 2011, it is 84% from the total revenue from US; which is still too high.

GAPs Inc.



Situational Analysis.

Table 5: SFAS Matrix for GAP Inc. Weighted score Duration Comments Short Inter Long

Strategic factor



Total Scores

GAPs Inc.


6. Review of Mission and Objectives. Objectives: Indeed, in 1997 Gap was named Advertising Age's Marketer of the Year, recognized for its successful integration of marketing and merchandising strategy. It had built a brand by returning to TV after a dozen years, added legendary Coca-Cola marketer Sergio Zyman to its board and focused on a message of comfortable, casual clothes and easy shopping. Today you see a retail brand that has failed to evolve with consumers, with fashions that have missed the mark and marketing that has veered off course. Among the criticisms: Its target market, ranging from babies to men, pregnant women to teens, is much too broad; designs have been schizophrenic; its TV presence has waxed and waned; and an ill-advised logo change invoked consumer uproar. Gap needs fresh marketing; appealing merchandising; a crystal-clear point of view and compelling vision; a refined target consumer; energy and excitement; a more strategic promotional cadence; and fewer stores. In short, everything. "You can't solve Gap's problems by making better commercials," Mr. Jones continued. "When I was leaving, my biggest concern was Gap, as a brand, being purchased at a deal. People want Gap, just not at full price. Changing that behavior is a fundamental marketing strategy, not advertising." The imbalance was recognized by Gap Inc. chairman and chief executive officer Glenn Murphy at the firm's annual meeting Tuesday, where he told shareholders: In North America, we have to be more of a consistent performer, quarter in, quarter out. We haven't been consistent enough. We need new categories, new customers, and we are changing the pipeline to be a lot faster, and to make better decisions, in such areas as design and inventory management.

GAPs Inc.


The objective, Murphy said, is to deliver moderate, steady growth in our North American business and reverse years of declining sales and traffic. Gap brand management shakeouts were seen on both the creative and operations sides. Among the recent departures, chief designer Patrick Robinson, who has not yet been replaced, and Marka Hansen, who was succeeded by Art Peck as president of Gap North America. Gap also sees downsizing stores as part of the solution. We need to continue to evolve our fleet, Murphy said. Since 2007, our square footage on existing stores is down 8 percent. With international and online sales on the rise, Gap executives put the emphasis on top-line sales growth, which Simmons described as the first priority. Murphy underscored the point, stating that international and online sales are seen growing to a minimum of 30 percent of the company's revenues by 2013 versus 22 percent last year, representing, as Murphy said, a very large strategic shift in our company.One of the goals the company has is to be sharing American style around the world. We have a significant runway on the global stage. He sees Gap operating 550 company-owned stores around the world in 2013, compared to the 354 as of last year, and taking the expansion in China to the next level in 2012 and beyond. Other objectives: Pumping up the Piperlime Web site by adding brands. Building up Athleta and capitalizing on the brand's unbelievable customer affinity. Raising the number of franchises to 400 by 2014 or sooner. Gap has about 200 franchises in 24 countries and this week unveiled agreements for Serbia and the Ukraine.

GAPs Inc.
Strategies reviews:


The risk that changes in general economic conditions or consumer spending patterns will have a negative impact on the companys financial performance or strategies; The highly competitive nature of the companys business in the United States and internationally; The risk that the company or its franchisees will be unsuccessful in gauging fashion trends and changing consumer preferences; The risk that the companys efforts to expand internationally may not be successful and could impair the value of its brands; The risk that trade matters, sourcing costs, events causing disruptions in product shipments from China and other foreign countries, or an inability to secure sufficient manufacturing capacity may disrupt the companys supply chain or operations, or impact its financial results; The risk that the impacts of the March 2011 earthquake, tsunami and nuclear crisis in Japan, including reduced consumer spending, will continue to have adverse effects on the companys business, financial position and strategies; The risk that the companys franchisees will be unable to successfully open, operate, and grow the companys franchised stores; The risk that the company or its franchisees will be unsuccessful in identifying, negotiating, and securing new store locations and renewing or modifying leases for existing store locations effectively; The risk that comparable sales and margins will experience fluctuations; The risk that the company will be unsuccessful in implementing its strategic, operating and people initiatives;

GAPs Inc.


The risk that changes in the companys credit profile or deterioration in market conditions may limit its access to the capital markets and adversely impact its financial results and its ability to service its debt while maintaining other initiatives; The risk that updates or changes to the companys information technology (IT) systems may disrupt its operations; The risk that acts or omissions by the companys third-party vendors, including a failure to comply with the companys code of vendor conduct, could have a negative impact on its reputation or operations; The risk that the company does not repurchase some or all of the shares it anticipates purchasing pursuant to its repurchase program; The risk that the adoption of new accounting pronouncements will impact future results; The risk that changes in the regulatory or administrative landscape could adversely affect the companys financial condition, strategies, and results of operations; and The risk that the company will not be successful in defending various proceedings, lawsuits, disputes, claims, and audits.

GAPs Inc.


6. Strategic Alternatives and Recommended Strategy. Strategic Alternatives

Table 6: TOWS Matrix for GAP Inc.

Suggested strategies:

growth strategy through multiple brands, channels and geographies; sustained growth across the business; future revenue mix between North America, international and online; reducing dependency on North America stores; international growth, including additional company-operated stores in China, Europe and Japan; franchise growth worldwide; Old Navy expansion internationally; and further international online expansion;

Athleta and Piperlime growth, including through additional Athleta stores and potential Piperlime stores;

pipeline speed; overall consistency, including in products, marketing, execution and results; new product categories;

GAPs Inc.
third party partnerships;


growing the top line through modest positive comps and growth vehicles that deliver solid returns;

expanding gross margin; maintaining expense discipline; future margins, including returning operating margin to its earlier highs over time; distributing excess cash to shareholders through dividends and share repurchases; growing total North America sales through a smaller, healthier specialty store fleet supplemented by sales growth in the online and outlet channels;

future North America store counts and square footage; future costs and merchandise margins, including impact of expected normalized cotton prices in 2012;

rebuilding financial performance; future online revenue and operating income; online ship-from-store expansion and impact; mobile ecommerce initiatives and impact, including multi-channel initiatives; product improvements; future marketing initiatives and spending; and Store remodels.

GAPs Inc.
Strategy Pros Cons


Labor costs in China10-20%, Global expansion Inflation in China. Economic problems in Europe (unemployment) Focus on the Internet market 2010 survey shows that while 71% of parents are personally affected by the economic downturn, 90% say they are spending less on themselves so they can spend more on their children. (GapKids and babyGap) Chinas GDP is increasing at a rate faster than US GDP

Focus on the Children Segment

China market Growth Downsizing the US stores (By 2013, closing 200 Gaps, bringing the fleet down to 700 units, and skinnying down Banana Republic to 425 units from the current 456. Old Navy will pare down to 950 units from 1,027. Maximizing the pipeline

focus on new category development (Old Navy Jewelry)

GAPs Inc.
Recommended Strategy


We recommend the following strategies:

GAPs Inc.



Evaluation and Control

The concept is to measure the overall performance for the new business unit GAP Inc. and its effect Output controls 1. Input controls 2. Behavior controls 3. Risk Management The Board has an active role in overseeing the management of the Companys risks. Annually, the Companys Internal Audit department performs a comprehensive enterprise risk assessment encompassing a number of significant areas of risk, including strategic, operational, compliance, financial, and reputational risks. The assessment process is designed to gather data regarding the most important risks that could impact the Companys ability to achieve its objectives and execute its strategies. Primary assessment methods include interviews with key executives and Board members, review of critical Company strategies and initiatives, and monitoring of emerging industry trends and issues. The assessment is reviewed by the Companys CEO, Chief Financial Officer (CFO), and Chief Compliance Officer and presented to the Board to facilitate discussion of high risk areas. It provides the foundation for the annual Internal Audit plan, managements monitoring and risk mitigation efforts, and ongoing Board oversight. In addition, on a regular basis, management communicates with the Board, both formally and informally, about key initiatives, strategies and industry developments, in part to assess and manage the potential risks. While the Board of Directors has the ultimate oversight responsibility for the risk management process, various committees of the Board also have responsibility for risk

GAPs Inc.


management. In particular, the Audit and Finance Committee focuses on financial and compliance risks, and the Compensation and Management Development Committee sets employee incentives with the goal of encouraging an appropriate level of risk-taking, consistent with the Companys business strategies. Compensation Risk Assessment The management conducted a comprehensive overall review of each of the Companys compensation policies and practices for the purpose of determining whether any of those policies and practices are reasonably likely to have a material adverse effect on the Company. As a part of this review, each of the Companys compensation policies and practices were compared to a number of specific factors that could potentially increase risk, including the specific factors that the SEC has identified as potentially triggering disclosure. The Company balanced these factors against a variety of mitigating factors. Examples of some of the mitigating factors are (i) compensation policies and practices are structured similarly across business units; (ii) the risk of declines in performance in our largest business units is well understood and managed; (iii) incentive compensation expense is not a significant. percentage of any significant units revenues; (iv) for executives, a significant portion of variable pay is delivered through long-term incentives which carry vesting schedules over multiple years; (v) a mix of compensation vehicles is used; (vi) stock ownership requirements for executives are in place; (vii) significant incentive plans are capped at all levels; (viii) threshold levels of performance must be achieved for the bulk of variable pay opportunities; and (ix) a clawback policy with respect to financial restatements is in place. Managements assessment was also presented to the Companys Chief Compliance Officer and the Chair of the Boards Compensation and Management Development Committee. As a result of managements review, the Company determined that its policies and practices are not reasonably likely to have a material adverse effect on the Company.

GAPs Inc.


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 p e o p l e w h o w o u l d p a y a h i g h e r p r i c e f o r m o r e s o p h i s t i c a t e d d r e s s . H a v i n g f a c e d s o m a n y different hurdles, Gap has proved its worthiness. But current problems in cash flow shows need f o r t h e companys change in marketing, management, or financial strategies. S i n c e i t i s a n established name, if strong plans are traced out, the company should be able to maintain its superiority in retail industry.