Gap

A. Case Abstract Gap Corporation (www.gapinc.com) is a comprehensive business policy and strategic management case that includes the companys fiscal year-end February 2007 financial statements, competitor information and more. The case time setting is the year 2008. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in San Francisco, California, Gaps common stock is publicly-traded on the New York Stock Exchange under the ticker symbol GPS. Gap sells fine clothing in the United States, Canada, UK, France, Ireland, and Japan in over 3,000 stores. The company operates under the brand names Gap, Old Navy, Banana Republic, and Forth & Towne. Gap has over 150,000 employees and is led by CEO Marka Hansen. The firms major competitors are American Eagle and Abercrombie & Fitch. B. Vision Statement (proposed) Our vision is to become the number one specialty clothing retailer in the world. C. Mission Statement (proposed) Our mission is to provide customers with the most up-to-date, high quality fashion at an affordable price. (1, 2) Gap will provide products and services in numerous markets so our customers can have easier access to our products, which creates top of the mind awareness. (3) Using the most advanced inventory logistics and procurement technology, we will control costs and offer products at the most competitive price in the retail industry. (4) We will achieve sustained growth and financial soundness and maximize shareholder wealth. We carefully will formulate strategic management plans to assure a bright future direction of the company. (5) Valuing our employees well-being over profits, we strive to create a blissful and business-casual work environment that is stress-free and creative. Gap stores offer a relaxing atmosphere where customers can shop at their leisure without any pressure to buy. This is one of Gaps main distinctive competencies. (6,7). We strive to create goodwill in the community and to have environmentally friendly production methods. (8) Because we realize that our employees are the foundation of our firm, we offer them excellent health care benefits and reasonable salaries based of their job performance. (9) 1. 2. 3. 4. 5. 6. 7. 8. 9. Customer Products or services Markets Technology Concern for survival, profitability, growth Philosophy Self-concept Concern for public image Concern for employees

D.

External Audit Opportunities 1. Business casual dress in the workplace is becoming more popular and is replacing the traditional suit and tie work environment (countercultures standard costume). 2. The Internet (E-commerce) has a major impact on how customers buy clothes. 3. Dependable U.S. economy (low inflation) allows customers to buy more luxury goods with the same amount of money. 4. People today tend to buy baby and childrens clothes more from boutiques and specialty clothing stores. 5. More people desire name brand clothes instead of generic clothes. 6. Brand loyalty towards specialty clothing stores has increased exponentially. 7. Teens in Europe desire traditional American style clothing from hip and trendy clothing stores. 8. Foreigners desire and demand to buy jeans from American stores because they are significantly priced lower than abroad. 9. Shoppers demand big, odd, and tailored sized clothing. 10. Customers want one-stop shopping, which entails shoes and accessories. Threats

Anti-Gap Inc. groups harm the general well-being of the company. Stores like Express and Hollister offer better quality and more attractive clothing. Stores like American Eagle and Ann Taylor offer more accessories and better quality shoes. Stores such as Abercrombie & Fitch have more effective marketing and advertising campaigns to reach the desired audience (catalogs). More baby boomers value investing money in mutual funds and other investments rather than on spending their money on fashionable clothing. Stores with after market sales, like Rugged Warehouse, take away from Gap sales and profits. Customers having the opportunity to buy Gap clothing (knock-offs) on eBay undermines the companys overall profits. Some people desire more high-end clothing and accessories, like Calvin Klein, rather than similar clothes at lower prices. Competitors are located in more optimal locations, like high traffic areas in malls (for example, near food courts and restrooms). Competitors overall interior dcor fits more appropriately to the type of clothing they are selling. CPM Competitive Profile Matrix 1. 2. 3. American Eagle Gap Inc. Critical Success Factors Weight Rating Weighte d Score Market Share 0.09 3 0.27 Price Competitiveness 0.15 3 0.45 Management 0.11 1 0.11 Product Quality 0.17 2 0.34 Consumer Loyalty 0.09 3 0.27 Global Expansion 0.10 4 0.40 E-Commerce 0.17 4 0.68 Customer Service 0.12 4 0.48 TOTAL 1.00 3.00 External Factor Evaluation (EFE) Matrix Rating 2 3 3 4 3 2 4 3 Weighte d Score 0.18 0.45 0.33 0.68 0.27 0.20 0.68 0.36 3.15 Abercrombie & Fitch Rating Weighted Score 2 0.18 3 0.45 3 0.33 4 0.68 3 0.27 3 0.30 4 0.68 2 0.24 3.13

Key External Factors Opportunities 1. Business casual dress in the workplace is becoming more popular and is replacing the traditional suit and tie work environment (countercultures standard costume). 2. The Internet (E-commerce) has a major impact on how customers buy clothes. 3. Dependable U.S. economy (low inflation) allows customers to buy more luxury goods with the same amount of money. 4. People today tend to buy baby and childrens clothes more from boutiques and specialty clothing stores. 5. More people desire name brand clothes instead of generic clothes. 6. Brand loyalty towards specialty clothing stores has increased exponentially. 7. Teens in Europe desire traditional American style clothing from hip and trendy clothing stores. 8. Foreigners desire and demand to buy jeans from American stores because they are significantly priced lower than abroad. 9. Shoppers demand big, odd, and tailored sized clothing. 10. Customers want one-stop shopping, which entails shoes and accessories. Threats 1. Anti-Gap Inc. groups harm the general wellbeing of the company. 2. Stores like Express and Hollister offer better quality and more attractive clothing.

Weight

Rating

Weighted Score

0.07 0.08 0.05 0.01 0.06 0.08 0.03 0.02 0.05 0.07 0.02 0.08

4 4 1 3 4 4 3 1 3 4 3 3

0.28 0.32 0.05 0.03 0.24 0.32 0.09 0.02 0.15 0.28 0.06 0.24

Stores like American Eagle and Ann Taylor offer more accessories and better quality shoes. 4. Stores such as Abercrombie & Fitch have more effective marketing and advertising campaigns to reach the desired audience (catalogs). 5. More baby boomers value investing money in mutual funds and other investments rather than on spending their money on fashionable clothing. 6. Stores with after market sales, like Rugged Warehouse, take away from Gap sales and profits. 7. Customers having the opportunity to buy Gap clothing (knock-offs) on eBay undermines the companys overall profits. 8. Some people desire more high-end clothing and accessories, like Calvin Klein, rather than similar clothes at lower prices. 9. Competitors are located in more optimal locations, like high traffic areas in malls (for example, near food courts and restrooms). 10. Competitors overall interior dcor fits more appropriately to the type of clothing they are selling. TOTAL 3.

0.04

0.12

0.04

0.16

0.06 0.03 0.06 0.05 0.05 0.05 1.00

4 2 1 2 3 3

0.24 0.06 0.06 0.10 0.15 0.15 3.12

E.

Internal Audit Strengths 1. Gap Inc. takes part in the Product Red Campaign, which helps fight AIDS in Africa. 2. Gap Inc. made the 100 Best Corporate Citizens List in 2006 and 2007 (ranked number 21). This shows that Gap Inc. has a good social standing in the community. 3. Gap Inc. created Gap Foundation, which gives money and time to communities in need (this makes Gap more attractive to investors because this shows social responsibility). 4. Gap is known for featuring celebrities in their print and television advertisements (over 300 celebrities have been featured) because when a person sees their favorite celebrity wearing certain clothes, they want to emulate their style. 5. Women are represented well in the upper rankings of Gap Inc., this addresses the problem of a glass ceiling in the company. 6. Gap Inc. became the 1st major U.S. retailer to accept independent monitoring of working conditions in a contract factory producing its garments. 7. Gap Inc. scored highest in diversity, human rights, and governance categories (Business Ethics Magazine). 8. Easy online purchasing and easy navigation throughout websites to purchase apparel (they do this by having a separate link for each clothing section i.e. mens, womens, and childrens). 9. Located in foreign markets (Canada, United Kingdom, Ireland, France, and Japan).

10. Different divisions to cater to a wide variety of age groups, including Gap Kids, Gap Baby, and maternity apparel. Weaknesses 1. Gross profit has declined from 2005 to 2006 by roughly half a billion dollars. 2. Clothing quality is not up to par compared to competitors clothing that is offered at the same price. 3. Dcor does not correlate to the types of clothing being sold. 4. Technology is not updated frequently (for example, cash registers are not updated during sales). 5. Little to no availability of extra small or full-figured sizes is problematic for all Gap Inc. stores. 6. Total assets have decreased from 10 billion to 8.8 billion in 2006. 7. Square footage of fitting rooms are too small compared to competitors fitting rooms, like Lane Bryant and American Eagle. 8. Current interim CEO, Robert Fisher and previous CEO, Paul Pressler do not have the correct skill-set to lead the company to dominate the industry. 9. Unrelated diversification in Old Navy stores makes customers confused about what kind of store Old Navy is and what it sells. 10. Do not have enough promotions, such as coupons, to entice customers to shop in our stores. Financial Ratio Analysis (February 2007) Growth Rates % Sales (Qtr vs year ago qtr) Net Income (YTD vs YTD) Net Income (Qtr vs year ago qtr) Sales (5-Year Annual Avg.) Net Income (5-Year Annual Avg.) Dividends (5-Year Annual Avg.) Price Ratios Current P/E Ratio P/E Ratio 5-Year High P/E Ratio 5-Year Low Price/Sales Ratio Price/Book Value Price/Cash Flow Ratio Profit Margins Gross Margin Pre-Tax Margin Net Profit Margin 5Yr Gross Margin (5-Year Avg.) 5Yr PreTax Margin (5-Year Avg.) 5Yr Net Profit Margin (5-Year Avg.) Financial Condition Debt/Equity Ratio Current Ratio Quick Ratio Interest Coverage Leverage Ratio Book Value/Share Investment Returns % Return On Equity Gap 0.10 4.00 21.30 2.86 NA 29.23 19.4 NA NA 0.92 3.25 10.90 35.4 8.4 5.1 36.6 9.4 5.8 0.04 1.8 0.9 NA 1.9 6.06 16.8 Industry 6.70 12.50 -19.00 10.38 20.28 10.44 18.1 33.6 8.6 1.19 4.29 9.70 37.6 10.4 6.8 38.6 10.3 6.4 0.39 2.2 1.1 14.3 2.3 8.20 36.8 SP-500 13.70 16.80 7.30 13.41 19.94 10.20 21.4 22.8 5.6 2.31 3.29 9.30 33.9 17.4 12.3 33.7 16.8 11.7 1.02 0.9 0.7 43.4 3.7 16.06 20.9

Return On Assets 9.2 Return On Capital 13.5 Return On Equity (5-Year Avg.) 20.0 Return On Assets (5-Year Avg.) 9.6 Return On Capital (5-Year Avg.) 12.7 Management Efficiency Income/Employee 5,331 Revenue/Employee 104,013 Receivable Turnover NA Inventory Turnover 4.1 Asset Turnover 1.8 Adapted from www.moneycentral.msn.com Date 02/07 01/06 01/05 01/04 02/03 Date Avg. P/E 19.80 15.70 17.70 16.60 25.10 Price/Sales 1.02 0.98 1.33 1.16 0.89

12.6 17.7 19.5 10.7 14.1 17,670 235,055 69.6 4.1 1.8 Price/Book 3.06 2.75 3.80 3.59 3.55 ROE (%) 15.0 20.5 23.3 22.2 13.1

5.8 7.8 14.2 5.0 6.7 33,928 324,055 9.5 5.5 0.6 Net Profit Margin (%) 4.9 6.9 7.1 6.5 3.3 ROA (%) 9.1 12.6 11.4 9.6 4.8 Interest Coverage 28.6 38.8 11.9 8.0 4.1

Book Value/ Debt/Equity Share 02/07 $6.36 0.10 01/06 $6.33 0.09 01/05 $5.74 0.38 01/04 $5.18 0.60 02/03 $4.12 0.93 Adapted from www.moneycentral.msn.com Net Worth Analysis (July 2007 in millions)

1. Stockholders Equity + Goodwill = 5,175 + 2. Net income x 5 = $778 x 5= 3. Share price = $19/EPS 1.00 =$19.00 x Net Income $778 = 4. Number of Shares Outstanding x Share Price = 750 x $19 = Method Average Internal Factor Evaluation (IFE) Matrix Key Internal Factors Strengths 1. Gap Inc. takes part in the Product Red Campaign, which helps fight AIDS in Africa. 2. Gap Inc. made the 100 Best Corporate Citizens List in 2006 and 2007 (ranked number 21). This shows that Gap Inc. has a good social standing in the community. 3. Gap Inc. created Gap Foundation, which gives money and time to communities in need (this makes Gap more attractive to investors because this shows social responsibility). 4. Gap is known for featuring celebrities in their print and television advertisements (over 300 celebrities Weight Rating

$5,174 $ 3,890 $ 14,782 $ 14,250 $9,524

Weighted Score 0.12

0.04

0.05

0.15

0.05 0.06

3 4

0.15 0.24

have been featured) because when a person sees their favorite celebrity wearing certain clothes, they want to emulate their style. 5. Women are represented well in the upper rankings of Gap Inc., this addresses the problem of a glass ceiling in the company. 6. Gap Inc. became the 1st major U.S. retailer to accept independent monitoring of working conditions in a contract factory producing its garments. 7. Gap Inc. scored highest in diversity, human rights, and governance categories (Business Ethics Magazine). 8. Easy online purchasing and easy navigation throughout websites to purchase apparel (they do this by having a separate link for each clothing section i.e. mens, womens, and childrens). 9. Located in foreign markets (Canada, United Kingdom, Ireland, France, and Japan). 10. Different divisions to cater to a wide variety of age groups, including Gap Kids, Gap Baby, and maternity apparel. Weaknesses 1. Gross profit has declined from 2005 to 2006 by roughly half a billion dollars. 2. Clothing quality is not up to par compared to competitors clothing that is offered at the same price. 3. Dcor does not correlate to the types of clothing being sold. 4. Technology is not updated frequently (for example, cash registers are not updated during sales). 5. Little to no availability of extra small or full-figured sizes is problematic for all Gap Inc. stores. 6. Total assets have decreased from 10 billion to 8.8 billion in 2006. 7. Square footage of fitting rooms are too small compared to competitors fitting rooms, like Lane Bryant and American Eagle. 8. Current interim CEO, Robert Fisher and previous CEO, Paul Pressler do not have the correct skill-set to lead the company to dominate the industry. 9. Unrelated diversification in Old Navy stores makes customers confused about what kind of store Old Navy is and what it sells. 10. Do not have enough promotions, such as coupons, to entice customers to shop in our stores. TOTAL

0.02

0.06

0.04 0.05

3 3

0.12 0.15

0.1 0.1 0.07 0.06 0.06 0.05 0.04 0.04 0.02 0.02 0.08 0.02 0.03 1.00

4 4 4 1 1 1 2 2 2 2 1 2 2

0.40 0.40 0.28 0.06 0.06 0.05 0.08 0.08 0.04 0.04 0.08 0.04 0.06 2.66

F.

SWOT Strategies

SO Strategies 1. Gap Inc. can make the website easier to use and can offer a bigger selection online for clothing, shoes, and accessories (S8,O10). 2. More people are desiring brand name clothes, Gap Inc. could use more well-known celebrities in their campaigns as an approach to make the name brand more popular (S4, O5) 3. Gap Inc. can make big, odd, and more tailored clothing offered on their website by taking advantage of their e-commerce and easy online purchasing (S8, O9, O2). 4. Gap Inc. can improve their Baby Gap and Gap Kids clothing stores by giving them more of a boutique style because many people like to buy baby and children's clothing from boutiques and specialty stores (S10, O4). 5. Gap Inc. can expand on their strong foundation of stores in Europe to capture the market of teens demanding American style clothing (S9, O7). 6. The economy is doing well, therefore consumers are spending money on our clothing, so company should donate money to our foundation quarterly (S3, O3). WO Strategies 1. Gap Inc. can change how their websites are laid out and designed to capture the interest of online shoppers since e-commerce has a large impact on how people buy clothes (W3, O1). 2. The company needs to improve its IT (internet technology) department to update sales and promotions to make it easier to shop online (W4, O2) 3. Quality of clothing in baby and children's stores need to be updated to a more boutique like style to match competitors because people today tend to buy their clothes more from boutiques and specialty stores (W2, O4). 4. Gap Inc. should hire a CEO that has a well-rounded knowledge of clothing trends, for example, tailored clothing and special sizes (W5, W8, O9). 5. Send more coupons via mail to establish more of a brand loyalty because this will give shoppers another incentive to shop at Gap Inc. stores, which will increase brand loyalty (W10, O5, O6). 6. Switch from unrelated to related diversification to improve on current shoes and accessory lines, which will help gain more customer satisfaction because they want one-stop shopping (W9, O10). 7. Focus more on the business casual style, which is now more popular, to help improve gross profits (W1, O1). ST Strategies 1. Do more promotion on Gap Inc. making the "100 Best Corporate Citizens' List" for two years, which will deter from anti-Gap Inc. groups who harm the reputation of the company (S2, T1). 2. Focus more on e-commerce since competitors' stores are in more optimal locations (S8, T9). 3. Create more catalogs with more celebrities in them and improve upon current catalogs to gain more effective marketing and advertising (S4, T4). 4. Promote more that Gap became the first major retailer to accept independent monitoring of working conditions with its contract factory to deter from anti-Gap Inc. groups who give the company negative publicity (S6, T1). 5. Create a division that caters towards baby boomers so they will shop at Gap Inc. stores (S10, T5). 6. Expand our European stores to carry more upscale clothing to meet the foreign demand for U.S styles of clothes (S9, T8).

WT Strategies 1. In the Old Navy Stores, we can replace some of the unrelated diversification with a better selection of accessories and shoes (W9, T3). 2. In order to have Gap Inc. clothing more up to par with competitors' clothing, we can offer clothes with a more high-end style (W2, T8). 3. Find a CEO that has more well-rounded experience in the apparel industry to design more attractive clothing to compete in the industry(W8, T2). 4. Since Gap Inc. is not always located in optimal places, we can focus on redesigning the interior and exterior dcor of our stores (W3, T9). 5. Offer a line of clothing geared toward baby boomers and use promotions, like coupons via the mail, to make them more aware of the new clothing line (W10, T5). 6. Promote more by creating a catalog for Gap Inc. stores, similar to what Abercrombie & Fitch has, to enhance marketing and capture interest from consumers (W10, T4). 7. Continue to focus on upper end customers during economic slowdowns. (W4, W5, W6, T1, T2) G. SPACE Matrix
Conservative FS 6 5 4 3 2 1 CA IS Aggressive

-6

-5

-4

-3

-2

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

Defensive

ES

Competitive

Financial Strength (FS) Return on Assets (ROA) Leverage Net Income Brand Name Inventory Turnover Financial Strength (FS) Average Competitive Advantage (CA) Market Share Product Quality Customer Loyalty Technological know-how Control over Suppliers and Distributors Competitive Advantage (CA) Average

4 6 3 5 5 4.6

Environmental Stability (ES) Rate of Inflation Technological Changes Price Elasticity of Demand Competitive Pressure Barriers to Entry into Market Environmental Stability (ES) Average Industry Strength (IS) Growth Potential Financial Stability Ease of Entry into Market Resource Utilization Profit Potential

-2 -2 -2 -5 -2 -2.6

-3 -3 -2 -2 -2

5 5 3 5 5 4.6

-2.4 Industry Strength (IS) Average

x-axis: -2.4 + 4.6 = 2.2 y-axis: 4.6 + -2.6 = 2.0 H. Grand Strategy Matrix
Rapid Market Growth Quadrant II Quadrant I

Weak Competitive Position

Strong Competitive Position

Quadrant III Slow Market Growth

Quadrant IV

10

I.

The Internal-External (IE) Matrix The IFE Total Weighted Score Strong 3.0 to 4.0 I Average 2.0 to 2.99 II Weak 1.0 to 1.99 III

High 3.0 to 3.99

Gap

Medium The EFE Total 2.0 to 2.99 Weighted Score

IV

VI

Low 1.0 to 1.99

VII

VIII

IX

Grow and Build

J.

QSPM

11

Strategic Alternatives Key Internal Weight Strengths 1. Gap Inc. takes part in the Product Red Campaign, which helps fight AIDS in Africa. 2. Gap Inc. made the 100 Best Corporate Citizens List in 2006 and 2007 (ranked number 21). This shows that Gap Inc. has a good social standing in the community. 3. Gap Inc. created Gap Foundation, which gives money and time to communities in need (this makes Gap more attractive to investors because this shows social responsibility). 4. Gap is known for featuring celebrities in their print and television advertisements (over 300 celebrities have been featured) because when a person sees their favorite celebrity wearing certain clothes, they want to emulate their style. 5. Women are represented well in the upper rankings of Gap Inc., this addresses the problem of a glass ceiling in the company. 6. Gap Inc. became the 1st major U.S. retailer to accept independent monitoring of working conditions in a contract factory producing its garments. 7. Gap Inc. scored highest in diversity, human rights, and governance categories (Business Ethics Magazine). 8. Easy online purchasing and easy navigation throughout websites to purchase apparel (they do this by having a separate link for each clothing section i.e. mens, womens, and childrens). 9. Located in foreign markets (Canada, United Kingdom, Ireland, France, and Japan). 10. Different divisions to cater to a wide variety of age groups, including Gap Kids, Gap Baby, and maternity apparel. Weaknesses 1. Gross profit has declined from 2005 to 2006 by roughly half a billion dollars. 2. Clothing quality is not up to par compared to competitors clothing that is offered at the same price. 3. Dcor does not correlate to the types of clothing being sold. 4. Technology is not updated frequently (for example, cash registers are not updated during sales). 5. Little to no availability of extra small or fullFactors Produce a Line of Big and Tall Clothing AS 0.04 --TAS --Offer a Line of Clothing for Baby Boomers AS --TAS ---

0.05

---

---

---

---

0.05

---

---

---

---

4 0.06 0.02 ---

0.24

0.18

---

---

---

0.04 0.05

-----

-----

-----

-----

2 0.10 0.10 0.07 0.06 0.06 0.05 0.04 0.04 3 2 --4 -----

0.20 0.30 0.14 --0.24 -----

4 2 3 --1 -----

0.40 0.20 0.21 --0.06 -----

12

figured sizes is problematic for all Gap Inc. stores. 6. Total assets have decreased from 10 billion to 8.8 billion in 2006. 7. Square footage of fitting rooms are too small compared to competitors fitting rooms, like Lane Bryant and American Eagle. 8. Current interim CEO, Robert Fisher and previous CEO, Paul Pressler do not have the correct skill-set to lead the company to dominate the industry. 9. Unrelated diversification in Old Navy stores makes customers confused about what kind of store Old Navy is and what it sells. 10. Do not have enough promotions, such as coupons, to entice customers to shop in our stores. SUBTOTAL

4 0.02 0.02 ----4 0.08 0.02 0.03 1.00 --3

0.16 ----0.32

1 ----3

0.04 ----0.24

--0.09 1.69

--1

--0.03 1.44

Key External Weight Opportunities 1. Business casual dress in the workplace is becoming more popular and is replacing the traditional suit and tie work environment (countercultures standard costume). 2. The Internet (E-commerce) has a major impact on how customers buy clothes. 3. Dependable U.S. economy (low inflation) allows customers to buy more luxury goods with the same amount of money. 4. People today tend to buy baby and childrens clothes more from boutiques and specialty clothing stores. 5. More people desire name brand clothes instead of generic clothes. 6. Brand loyalty towards specialty clothing stores has increased exponentially. 7. Teens in Europe desire traditional American style clothing from hip and trendy clothing stores. 8. Foreigners desire and demand to buy jeans from American stores because they are significantly priced lower than abroad. 9. Shoppers demand big, odd, and tailored sized clothing. 10. Customers want one-stop shopping, which entails shoes and accessories. Threats 1. Anti-Gap Inc. groups harm the general wellbeing of the company. 2. Stores like Express and Hollister offer better

Factors

Produce a Line of Big and Tall Clothing AS TAS

Offer a Line of Clothing for Baby Boomers AS TAS

0.07 0.08 0.05 0.01 0.06 0.08 0.03 0.02 0.05 0.07 0.02 0.08

2 4 --2 ----2

0.14 0.32 --0.02 ----0.06

3 2 --1 ----1

0.21 0.16 --0.01 ----0.03

2 4 -----

0.04 0.20 -----

3 3 -----

0.06 0.15 -----

13

quality and more attractive clothing. Stores like American Eagle and Ann Taylor offer more accessories and better quality shoes. 4. Stores such as Abercrombie & Fitch have more effective marketing and advertising campaigns to reach the desired audience (catalogs). 5. More baby boomers value investing money in mutual funds and other investments rather than on spending their money on fashionable clothing. 6. Stores with after market sales, like Rugged Warehouse, take away from Gap sales and profits. 7. Customers having the opportunity to buy Gap clothing (knock-offs) on eBay undermines the companys overall profits. 8. Some people desire more high-end clothing and accessories, like Calvin Klein, rather than similar clothes at lower prices. 9. Competitors are located in more optimal locations, like high traffic areas in malls (for example, near food courts and restrooms). 10. Competitors overall interior dcor fits more appropriately to the type of clothing they are selling. SUBTOTAL SUM TOTAL ATTRACTIVENESS SCORE 3. K. Recommendations

--0.04 0.04 ----3 0.06 --0.03 0.06 0.05 0.05 0.05 --2 -----

------0.18 ---

------4 ---

------0.24 ---

--0.10 ----1.06 2.85

--1 -----

--0.05 ----0.91 2.35

The QSPM strategies assessed producing a line of clothes for big and tall people or developing a line of clothes for seniors. It is suggest Gap, undertake option one at a cost of $500 million. L. EPS/EBIT Analysis $ Amount Needed: 500M Stock Price: $19 Tax Rate: 35% Interest Rate: 7% # Shares Outstanding: 750M
Common Stock Financing Recession Normal Boom 1,000,000,000 1,500,000,000 2,500,000,000 0 0 0 1,000,000,000 1,500,000,000 2,500,000,000 350,000,000 525,000,000 875,000,000 650,000,000 975,000,000 1,625,000,000 776,315,789 776,315,789 776,315,789 0.84 1.26 2.09 Recession 1,000,000,000 35,000,000 965,000,000 337,750,000 627,250,000 750,000,000 0.84 Debt Financing Normal Boom 1,500,000,000 2,500,000,000 35,000,000 35,000,000 1,465,000,000 2,465,000,000 512,750,000 862,750,000 952,250,000 1,602,250,000 750,000,000 750,000,000 1.27 2.14

EBIT Interest EBT Taxes EAT # Shares EPS

14

EBIT Interest EBT Taxes EAT # Shares EPS

70 Percent Stock - 30 Percent Debt Recession Normal Boom 1,000,000,000 1,500,000,000 2,500,000,000 10,500,000 10,500,000 10,500,000 989,500,000 1,489,500,000 2,489,500,000 346,325,000 521,325,000 871,325,000 643,175,000 968,175,000 1,618,175,000 768,421,053 768,421,053 768,421,053 0.84 1.26 2.11

70 Percent Debt - 30 Percent Stock Recession Normal Boom 1,000,000,000 1,500,000,000 2,500,000,000 24,500,000 24,500,000 24,500,000 975,500,000 1,475,500,000 2,475,500,000 341,425,000 516,425,000 866,425,000 634,075,000 959,075,000 1,609,075,000 757,894,737 757,894,737 757,894,737 0.84 1.27 2.12

15