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Gap – 2011

Forest David

A. Case Abstract
Gap is a comprehensive strategic management case that includes the company’s year-end 2010 financial
statements, organizational chart, competitor information and more. The case time setting is the year 2011.
Sufficient internal and external data are provided to enable students to evaluate current strategies and
recommend a three-year strategic plan for the company. Headquartered in San Francisco, California, Gap’s
common stock is publicly traded under the ticker symbol GPS.

The huge clothing retailer Gap has been filling closets with jeans and khakis, T-shirts, and poplin more than
three decades. The firm, which operates about 3,100 stores worldwide, owns and operates the urban chic
chain Banana Republic, budgeteer Old Navy, online-only retailer Piperlime, and Athleta, a purveyor of
activewear via catalog. Other brand extensions include GapBody, GapKids, and babyGap; each also has its
own online incarnation. All Gap clothing is private-label merchandise made exclusively for the company.
From the design board to store displays, Gap controls all aspects of its trademark casual look.

B. Vision Statement (proposed)


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

C. Mission Statement (proposed)


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

1. Customers
2. Products or services
3. Markets
4. Technology
5. Concern for survival, growth, and profitability
6. Philosophy
7. Self-concept
8. Concern for public image
9. Concern for employees

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D. External Audit
Opportunities

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

Threats

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

Competitive Profile Matrix

VF Corp. GAP Nike

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

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EFE Matrix

Opportunities Weight Rating Weighted Score


1. Eastern Europe is a fast growing market with Ukraine leading the 0.10 3 0.30
way.
2. Baby boomers are the largest per capita consumers of apparel. 0.04 2 0.08
3. 71 million teens in the US are maturing into young adults. 0.07 4 0.28
4. Consumers age 20-34 account for 24% of the appeal spending in 0.07 4 0.28
the US.
5. Consumers make choices at the last second and styles must be 0.06 2 0.12
adaptable.
6. Social media enables retailers to listen to customers in real time. 0.04 2 0.08
7. US consumers spent $192 billion in 2010 on apparel. 0.07 3 0.21
8. Southeast Asia has many skilled workers trained in apparel. 0.06 3 0.18
9. There continues to be reduced trade regulations and elimination 0.05 3 0.15
of tariffs.

Threats Weight Rating Weighted Score


1. US has high unemployment around 9% and low home prices. 0.05 2 0.10
2. High oil prices increase transportation costs. 0.08 2 0.16
3. Volatile nature of world currency rates. 0.04 2 0.08
4. Cotton prices are up over 100% from 2009. 0.10 2 0.20
5. Many consumers are obsessed with promotional pricing. 0.05 2 0.10
6. Strong competition from Abercrombie & Fitch, American Eagle,
0.08 3 0.24
VF Corp. and others.
7. S&P lowered the job outlook several times in 2011. 0.04 2 0.08
0.00 0 0.00
8. 0
TOTALS 1.00 2.64

E. Internal Audit
Strengths

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

Weaknesses

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

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

Financial Ratio Analysis

Growth Rate Percent Gap Industry S&P 500


Sales (Qtr vs year ago qtr) 2.10 10.00 14.50
Net Income (YTD vs YTD) NA NA NA
Net Income (Qtr vs year ago qtr) -19.20 25.50 48.60
Sales (5-Year Annual Avg.) -1.75 4.93 8.30
Net Income (5-Year Annual Avg.) 1.26 4.34 8.72
Dividends (5-Year Annual Avg.) 17.32 9.57 5.61

Profit Margin Percent


Gross Margin 39.0 40.0 39.5
Pre-Tax Margin 12.2 10.7 18.2
Net Profit Margin 7.4 6.9 13.2
5Yr Gross Margin (5-Year Avg.) 37.8 36.3 39.7

Liquidity Ratios
Debt/Equity Ratio 0.53 1.04 0.98
Current Ratio 2.2 2.4 1.3
Quick Ratio 1.4 1.4 0.9

Profitability Ratios
Return On Equity 29.3 30.2 26.0
Return On Assets 14.4 12.0 8.8
Return On Capital 20.0 16.0 11.8
Return On Equity (5-Year Avg.) 21.1 19.5 23.8
Return On Assets (5-Year Avg.) 12.4 9.3 8.0
Return On Capital (5-Year Avg.) 17.1 12.7 10.8

Efficiency Ratios
Income/Employee 8,134 24,619 126,792
Revenue/Employee 109,694 342,949 1 Mil
Receivable Turnover 82.6 78.4 15.2
Inventory Turnover 5.3 5.0 12.4

Net Worth Analysis (in millions)

Stockholders' Equity $4,080


Net Income x 5 $6,020
(Share Price/EPS) x Net Income $12,874
Number of Shares Outstanding x Share Price $9,925
Method Average $8,225

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IFE Matrix

Strengths Weight Rating Weighted Score


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

Weaknesses Weight Rating Weighted Score


1. By the end of 2013, Gap plans to close over 100 more of its
0.08 1 0.08
namesake stores in the U.S.
2. Has no formal vision or mission statement. 0.03 1 0.03
3. Has a hybrid divisional structure and would be best suited with
0.07 1 0.07
a SBU structure.
4. Offshore production does not allow Gap to adjust to quickly
0.05 1 0.05
changing customer preferences.
5. Gap’s PE Ratio is 10 compared to the industry average of 17.
0.07 1 0.07
Poor position for equity financing.
6. Paid $99M over book value for Athleta. 0.06 1 0.06
7. Focused only in the casual clothing market for customers
0.06 2 0.12
generally under 34 years old.
0.00 0 0.00
8. 0
TOTALS 1.00 2.77

F. SWOT
SO Strategies

1. Build 200 new stores in Eastern Europe (S1, S2, O1).


2. Build 50 stores in China (S4, S8, O8).

WO Strategies

1. Develop a formal Vision and Mission Statement (W2, O7).


2. Develop a SBU structure (W3, O7, O9).

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ST Strategies

1. Build 50 stores in China (S1, S4, S8, T1).


2. Form alliance with cell phone providers to notify customers of discounted items via text messages (S5,
T5).

WT Strategies

1. Develop a SBU structure (W3, T6).


2. Develop a new formal strategic plan to determine direction of the company (W1, W7, T1, T5, T6).

G. SPACE Matrix

FP
Conservative Aggressive
7

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

-2

-3

-4

-5

-6

-7
Defensive Competitive
SP

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Internal Analysis: External Analysis:
Financial Position (FP) Stability Position (SP)
Return on Investment (ROE) 4 Rate of Inflation -2
Debt to Equity 6 Technological Changes -2
Current Ratio 5 Price Elasticity of Demand -2
Working Capital 3 Competitive Pressure -5
Cash Flow 3 Barriers to Entry into Market -3
Financial Position (FP) Average 4.2 Stability Position (SP) Average -2.8

Internal Analysis: External Analysis:


Competitive Position (CP) Industry Position (IP)
Market Share -3 Growth Potential 3
Product Quality -4 Financial Stability 3
Customer Loyalty -3 Ease of Entry into Market 3
Technological know-how -3 Resource Utilization 3
Control over Suppliers and Distributors -4 Profit Potential 3
Competitive Position (CP) Average -3.4 Industry Position (IP) Average 3.0

H. Grand Strategy Matrix

Rapid Market Growth

Quadrant II Quadrant I

Gap

Weak Strong
Competitive Competitive
Position Position

Quadrant III Quadrant IV

Slow Market Growth

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

High

3.0 IV V VI

The
EFE Gap
Total Medium
Weighted
Scores

2.0 VII VIII IX

Low

1.0

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Fiscal Year 2010 ($ in Millions)
Brand: GAP Old Navy Banana Other Total Percentage of
Republic Net Sales

Region:
US $3,454 $4,945 $2,084 -0- $10,483 71%
Canada 341 427 190 -0- 958 7
Europe 703 -0- 36 47 786.5 5
Asia 872 -0- 118 59 1,049 7
Other Regions -0- -0- -0- 89 89 1
Total Stores reportable 5,370 5,372 2,428 195 13,365 91
segment
Direct reportable segment 365 533 155 246 1,299 9
Total $5,735 $5,905 $2,583 $441 $14,664 100%

J. QSPM

Add new Develop


stores strategic plan
Opportunities Weight AS TAS AS TAS
1. Eastern Europe is a fast growing market with Ukraine leading the
0.10 4 0.40 2 0.20
way.
2. Baby Boomers are the largest per capita consumers of apparel. 0.04 1 0.04 2 0.08
3. 71 million teens in the US are maturing into young adults. 0.07 3 0.21 2 0.14
4. Consumers age 20-34 account for 24% of the appeal spending in
0.07 3 0.21 2 0.14
the US.
5. Consumers make choices at the last second and styles must be
0.06 1 0.06 3 0.18
adaptable.
6. Social media enables retailers to listen to customers in real time. 0.04 0 0.00 0 0.00
7. US consumers spent $192 billion in 2010 on apparel. 0.07 3 0.21 2 0.14
8. Southeast Asia has many skilled workers trained in apparel. 0.06 0 0.00 0 0.00
9. There continues to be reduced trade regulations and elimination
0.05 4 0.20 3 0.15
of tariffs.

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.


Threats Weight AS TAS AS TAS
1. US is still suffering from high unemployment around 9% and low
0.05 2 0.10 3 0.15
home prices.
2. High oil prices increase transportation costs. 0.08 0 0.00 0 0.00
3. Volatile nature of world currency rates. 0.04 0 0.00 0 0.00
4. Cotton prices are up over 100% from 2009. 0.10 0 0.00 0 0.00
5. Many consumers are obsessed with promotional pricing. 0.05 0 0.00 0 0.00
6. Strong competition from Abercrombie & Fitch, American Eagle,
0.08 2 0.16 4 0.32
VF Corp and others.
7. S&P lowered the job outlook several times in 2011. 0.04 1 0.04 2 0.08

Add new Develop


stores strategic plan
Strengths Weight AS TAS AS TAS
1. Has stores in 29 countries in Asia, Europe, Latin America, 0.10 4 0.40 3 0.30
2. Has 180 franchise stores and plans to increase that to 400 by
0.08 4 0.32 3 0.24
2015.
3. Employs 134,000 people with 3,321 stores worldwide. 0.03 0 0.00 0 0.00
4. Diverse brands including Gap, Banana Republic, Old Navy,
0.08 1 0.08 3 0.24
Piperlime and Athleta.
5. Is working with Visa to deliver real-time discounts via SMS text
0.04 1 0.04 3 0.12
messages.
6. Well represented with women in upper management. 0.03 0 0.00 0 0.00
7. Excellent liquidity ratios. 0.05 0 0.00 0 0.00
8. Expects to have 45 stores in China by year end 2012. 0.04 4 0.16 2 0.08
9. Is the largest US clothing seller. 0.05 0 0.00 0 0.00
10. Only 1.5% of Gap’s total assets come from Goodwill. 0.08 0 0.00 0 0.00

Weaknesses Weight AS TAS AS TAS


1. By the end of 2013, Gap plans to close over 100 more of its
0.08 1 0.08 4 0.32
namesake stores in the U.S.
2. Has no formal vision or mission statement. 0.03 1 0.03 4 0.12
3. Has a hybrid divisional structure and would be best suited with
0.07 2 0.14 4 0.28
a SBU structure.
4. Offshore production does not allow Gap to adjust to quickly
0.05 0 0.00 0 0.00
changing customer preferences.
5. Gap’s PE Ratio is 10 compared to the industry average of 17.
0.07 0 0.00 0 0.00
Poor position for equity financing.
6. Paid $99M over book value for Athleta. 0.06 0 0.00 0 0.00
7. Focused only in the casual clothing market for customers
0.06 1 0.06 3 0.18
generally under 34 years old.
0.00 0 0.00 2 0.00
8. 0
TOTALS 2.94 3.46

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

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

L. EPS/EBIT Analysis (in millions)


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

Common Stock Financing Debt Financing


Recession Normal Boom Recession Normal Boom
EBIT $1,500 $2,000 $2,500 $1,500 $2,000 $2,500
Interest 0 0 0 41 41 41
EBT 1,500 2,000 2,500 1,460 1,960 2,460
Taxes 585 780 975 569 764 959
EAT 915 1,220 1,525 890 1,195 1,500
# Shares 552 552 552 510 510 510
EPS 1.66 2.21 2.76 1.75 2.34 2.94

20 Percent Stock 80 Percent Stock


Recession Normal Boom Recession Normal Boom
EBIT $1,500 $2,000 $2,500 $1,500 $2,000 $2,500
Interest 32 32 32 8 8 8
EBT 1,468 1,968 2,468 1,492 1,992 2,492
Taxes 572 767 962 582 777 972
EAT 895 1,200 1,505 910 1,215 1,520
# Shares 518 518 518 543 543 543
EPS 1.73 2.32 2.90 1.68 2.24 2.80

M. Epilogue

Gap plans to close over 100 more of its namesake stores in the U.S. by the end of 2013, part of a company
strategy to reduce its total square footage across all brands, and Gap in particular. By the end of 2012, Gap
Inc. will have reduced its total real estate square footage in North America by 10 percent compared to 2007
levels. Gap brand will cut its square footage 34 percent overall (compared to 2007 levels), resulting in 700
U.S. and Canada Gap stores and 250 Gap Outlet stores at the end of 2013. The company has 78 stores in
and around Los Angeles.

International sales and emerging Gap brands such as Athleta and Piperlime remain Gap's primary growth
vehicles as well as e-commerce. Athleta and Piperlime appear to be the only brands who will add North
American square footage in coming years. Gap plans to test a bricks-and-mortar Piperlime store concept
next year. A similar test of Athleta led to the activewear brand opening its first flagship in Fillmore Street
in San Francisco in January 2011.

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In contrast to Gap’s USA strategy, the company plans to triple the number of its namesake stores in China
by the end of 2012. The company will have opened 15 Gap stores by year-end 2011 in China and plans to
have a total of 45 by the end of 2012. In addition, Gap entered the South American market by opening its
first store in Chile in October 2011, and will open stores in Panama and Colombia in 2012. That first Gap
store in Chile is located at the Parque Arauco Mall in Santiago. Gap will open another store in Concepcion
in November.

The company plans to open Gap and Banana Republic stores in Panama starting with locations in Panama
City in January 2012, and it will open stores in Bogota, Colombia, in late 2012. All of these new stores
will have Gap, GapKids, babyGap and Banana Republic products. Gap has expanded to 29 countries in
Asia, Europe, Latin America and the Middle East in the past five years, opening franchise locations in 10
new countries in fiscal 2011 alone. Gap remains the largest U.S. clothing seller.

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