Gap, Inc. Corporate Performance Report
Angela D. Copeland
Gap, Inc.
Corporate Performance Report
By Angela Copeland
Professor Atwater
Macroeconomics MBAM 612.13
February 9, 2005
Table of Contents
Executive Summary...... 3
1. Economic Profitability……...... 5
2. Contributions of the Controllable Variables………………...... 8
3. Movements in the Controllable Variables…………………………..……...... 13
4. Movements in the Country’s Performance………...... 15
5. Country and Corporate Performance Prediction...... 19
Bibliography…………………………………………………………………………….22
Appendix A...... 23
Appendix B ...... 24
Appendix C ...... 25
Appendix D ...... 26
Appendix E ...... 27
Appendix F ...... 28
Appendix G ...... 29
Appendix H...... 30
Appendix I ...... 31
Appendix J ...... 32
Appendix K ...... 33
Executive Summary
“From Flauntywood to Slouchville, no slots are left exposed by ubiquitous clothing retailer Gap. The company has built its brand on basic, casual styles for men, women, and children, but over the years has expanded through the urban chic chain Banana Republic and fast-growing budgeteer Old Navy. Gap runs nearly 3,000 stores worldwide” (www.hoovers.com 02/05).
The Gap, Inc. Corporate Performance Report will discuss the following issues in detail:
ü Economic Profitability
o Gap, Inc.’s economic profits have gone through many changes over the past ten years. This can be mainly attributed to the creation of Old Navy (1995 increase) and rapid expansion leading to excess inventory (2001 decrease).
ü Contributions of the Controllable Variables
o Square footage and inventory movement both have a significant impact on Gap, Inc.’s profitability. The less square footage and the higher inventory turnover, the more profitable Gap will be.
ü Movements in the Controllable Variables
o Movements in the controllable variables of footage and inventory explain 58.37% of Gap, Inc.’s overall profit movement.
ü Movements in the Country’s Performance
o The U.S., Canadian, and Japanese GDP’s all have potential to impact Gap, Inc., with the U.S. and Canada having the most influence.
ü Country and Corporate Performance Prediction
o The countries (U.S., Canada, and Japan) and Gap, Inc. performances are expected to increase in the next year.
1. Economic Profitability
How does the economic profitability of Gap, Inc. change over the decade? When is the profit measure the highest and when is it the lowest? Explain what happened at the high and low points.
Please Note: Gap, Inc. has not yet released its FY2004-Q4 data; therefore FY1994-FY2003 will be used for the analysis included in this report.
Over the past ten years, Gap, Inc. has grown from just Gap and Banana Republic to include Baby Gap, Gap Kids, Gap Body, and Old Navy – with plans for petite and over 35 women expansions to come. The brand’s foundation is made up of “basic, casual styles for men, women, and children.” They have approximately 3,000 stores in the US, Canada, Europe, and Japan (www.hoovers.com 02/05).
Economic Profit
Gap, Inc.’s economic profits have gone through many changes over the past ten years, as it is seen in Figure 1 below. Their profits rose from a negative $21,685,000 in 1994 to a positive $82,083,000 in 1995. This change can be attributed to a concentration on profit margins (as opposed to sales) and the creation of the Old Navy brand. Old Navy is Gap’s budget line, selling adult, children, and dog clothing and accessories.
From 1995 to 1999, Gap, Inc. experienced positive economic growth as Gap expanded onto the internet (Gap.com – 1997) and into markets for children, babies, and adult body (1998). In 1999 to 2002 however, Gap experienced an extreme decline in economic profit. In 2000, Gap incorrectly forecasted fashion trends, a leading cause of the low earnings. Also during this time, the US economy was in decline due to factors such as September 11th and retailers were forced to mark down clothes at a record pace just to sell them. Gap had expanded their stores and inventory at a pace that was higher than needed and eventually, a 10% reduction in the Gap workforce was needed (www.hoovers.com 02/05).
In 2003, Gap began to make a strong comeback. This may be in part attributed to the split of Gap and Gap, Inc. in 2002 – a move made to improve overall company performance.
Figure 1: Economic Profit
Year / Economic Profit1994 / -21685.446
1995 / 82083.53167
1996 / 126698.4738
1997 / 134528.0191
1998 / 285431.4567
1999 / 341140.1389
2000 / -169780.3542
2001 / -845366.1975
2002 / -410879.2749
2003 / 169435.127
Table 1: Economic Profit
Economic Profit Movement
The largest percent change in Gap, Inc.’s profit came during specific points during the last ten years (Figure 2 and Table 2 below):
v 1995: +480% change in economic profit due to a concentration on margins as opposed to sales and the creation of Old Navy brand mentioned above. This was the highest change in the 10-year period.
v 2000 and 2001: -150% and -398% changes in economic profit due to incorrect judgment in fashion trends and a rapid expansion of stores, leaving Gap with an excess of unneeded inventory. This was further impacted by a US economic slump. This was the lowest change in the 10-year period.
v 2003: +141% change; Economic Profit and % Change in Profits are both up for the first time in three years.
Figure 2: Profit Movement
Year / Profit Movement1995 / 478.5189923
1996 / 54.35309772
1997 / 6.179668142
1998 / 112.1724966
1999 / 19.51735904
2000 / -149.7685071
2001 / -397.9175603
2002 / 51.39629712
2003 / 141.2372045
Table 2: Profit Movement
2. Contributions of the Controllable Variables
What do the regression results tell you about the contributions of the controllable variables? What do the signs and weightings indicate?
Controllable variables are those variables that a company may choose to manipulate with the goal of steering the company’s economic direction. Two controllable variables that are extremely important in the retail fashion industry are square footage and inventory movement.
Square Footage
Over the last decade, Gap, Inc. has continued to steadily increase the total square footage of their stores, with the exception of a slight reduction in 2003. From 1994 to 2000, Gap had a rapid growth of square footage that left them with the excess of inventory that affected their economic profit movement. At this time, CEO Fisher resigned and CEO Drexler took over, with a new focus on more conservative business practices. This change can be observed as the square footage expansion stabilized and then slowed into 2003, as failing stores were closed.
In addition to implementing more traditional practices, Gap also expanded internationally and has continued to develop into new markets. Old Navy expanded into plus sizes, while Banana Republic is planning to expand into petites in the near future. Gap, Inc. is also planning to launch a new brand “aimed at women 35 and older” (Dow Jones 11/04).
Figure 3: Company Square Footage per Year
Inventory Movement
As shown in Figure 4 below, Gap, Inc.’s inventory was increasing steadily from 1994 to 1997. From 1997 to 2000, their inventory increased at a much faster pace, with a reduction in inventory in both 2001 and 2003. This effort can be tied back to the more conservative practices implemented by Drexler.
Figure 4: Company Inventory per Year
Profit Movement vs. Inventory Movement and Square Footage Movement
First, a regression was performed with Gap’s profit movement versus their inventory movement and square footage movement. As it is seen below in Table 3, the Adjusted-R-Squared associated with this regression is only 0.146 or approximately 15%. This means that only 15% of Gap, Inc.’s profit movement can be attributed to inventory and / or square footage movement. This leaves approximately 85% of the profit movement unexplained. Therefore, this regression is a poor fit and does not give us enough information about the controllable variables.
Table 3: Regression Statistics for Profit Mvt. vs. Inventory Movement and Square Footage Movement
Profit Movement Vs. Inventory Movement and Square Footage Movement with Dummy Variable
Next, a similar regression was performed that takes into account a dummy variable. This dummy variable simulates a high percent change in economic profit that can be attributed to the 1994 creation of the Old Navy brand. With this taken into account, the Adjusted-R-Squared variable becomes 0.688 or approximately 69%. This means that 69% of Gap, Inc.’s profit movement can now be attributed to inventory and / or square footage movement. Now, only 31% of the profit movement is unexplained. Therefore, this regression has a much better goodness of fit than the previous regression and does give us more useful information about the controllable variables.
Table 4: Regression Statistics for Profit Mvt. Vs. Inventory Movement and Square Footage Movement
Conclusion
The regression above demonstrates that profitability will increase by 8.06% if Inventory Movement can increase by one percent (see the inventory movement coefficient in Table 5). Additionally, the Square Footage Movement coefficient of -15.74 indicates that one additional square foot will decrease profitability by 15.75%. In conclusion, it is recommended that Gap, Inc. either increase its inventory movement or decrease its total square footage. It should be noted that this contradicts the traditional practices implemented by Drexler. However, because inventory movement creates approximately one half the impact to profitability as does square footage, the first focus should be on square footage.
Table 5: Statistics for Profit Mvt. Vs. Inventory Movement and Square Footage Movement
3. Movements in the Controllable Variables
Overall, how much of the profit movement is explained by movements in the controllable variables? How much is left over?
Overall, a significant portion of the profit movement is explained by movements in the controllable variables. The regression performed above on Profit Movement versus Inventory Movement and Square Footage Movement explained 69% of Gap’s economic movement. Of the percentage explained, approximately 30% is explained by inventory and 55% is explained by square footage. Together, 85% (55%+30%) of the explained portion of the profit movement is attributed to these controllable variables. This is approximately 55% overall and thus the controllable variables are important and do have a significant impact on Gap, Inc.’s profit movement.
Figure 5: Percent Contribution of Controllable Variables
Table 6: Percent Contribution of Controllable Variables
4. Movements in the Country’s Performance
How much does the movement in the country’s performance affect Gap, Inc.’s performance? Assess why this occurs and how the impacts change over the decade.
Much of Gap, Inc.’s performance may lie in the hands of its customer country’s well-being. To determine the extent to which the country’s performance affects Gap, a regression was performed with Gap’s profit movement versus the GDP / h in the U.S., Canada, and Japan. As it is seen below in Table 7, the Adjusted-R-Squared associated with this regression is only 0.856 or approximately 85%. This means that 85% of Gap’s unexplained 31% profit movement above can be attributed to the GDP’s of the U.S., Canada, and Japan. This leaves only approximately 4% of the profit movement unexplained by square footage, inventory movement, or the GDP’s of the U.S., Canada, and Japan (31 - .85*31). Therefore, this regression is a good fit and does allow us to further understand Gap’s profit movement.
Table 7: Regression Statistics for Profit Mvt. Vs. US, Canada, and Japan GDP
Table 8 below helps us to further understand the impact of each individual country on the overall profit movement. The United States GDP / h coefficient is equal to -790.23. This means that there is a negative relationship between a rise in the US GDP / h and a rise in Gap’s profitability. This would seem to suggest that Gap, Inc.’s products are possibly considered inferior goods to the US population. Figure 6 shows that the US has contributed to approximately 34% of the Gap’s profitability over the past decade, therefore US GDP / h does have a significant impact on profitability.
The Canadian GDP / h coefficient is equal to 788.27 (see Table 8). This means that there is a positive relationship between a rise in the Canadian GDP / h and a rise in Gap’s profitability. Figure 6 shows that Canada has contributed to approximately 33% of the Gap’s profitability over the past decade. In addition, Figure 7 demonstrates that Canada makes up 39% of Gap’s international stores, therefore Canadian GDP / h does have a significant impact on profitability.
The Japanese GDP / h coefficient is equal to 697.42 (see Table 8). This means that there is a positive relationship between a rise in the Japanese GDP / h and a rise in Gap’s profitability. Figure 6 shows that Japan has contributed to only approximately 10% of the Gap’s profitability over the past decade, therefore Japanese GDP / h does not have a significant impact on profitability.
Table 8: Statistics for Profit Mvt. Vs. US, Canada, and Japan GDP
Figure 6: International Contributions by Country
Table 9: International Contributions by Country
Figure 7: International Store Makeup by Country
5. Country and Corporate Performance Prediction
Predict how the country performance index (CPI) will change in the next year. What will cause the changes you estimate? Explain how the change process will work using a circular flow of arguments.
As the CPI’s for the U.S., Canada, and Japan change in the next year, changes may occur within the company due to these shifts. The US, Canadian, and Japanese GDP’s are estimated to rise 3.3%, 3.1%, and 1.3% in the upcoming year according to their respective 2004 Political Risk Yearbooks.
As discussed above, the US economy will have the greatest impact on Gap, Inc. In the fall of 2004, U.S. sales were weak due to the high gas prices and “distractions of the presidential election” (Dow Jones, 11/04). In the future, the US economy will be influenced by the outcome of the US occupation of Iraq, gas prices, and interest rates. Overall though, the U.S. economy is expected to improve over the upcoming year.
In addition to an improving economy in the U.S., Gap is working to expand and develop new concepts. First, Gap, Inc. is focusing on a new brand aimed at women 35 and over, an untapped resource until now. In addition, Gap, Inc. just announced on February 7th, 2005 that they will expand Banana Republic to a petite line, catering to women 5’4” and under (Dow Jones, 02/05). 2005 is slated to be a year of growth and new endeavors for Gap, Inc.