What Old Navy's success says about retail

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In four years, Old Navy has achieved $ 1 billion in annual sales by fashionable, low-cost clothing for Americans of all ages. Old Navy has touched the kids and teens, as well as their parents. Last year, Old Navy achieved a turnover of about 8 billion dollars.

The strength of the retailer shows how Americans have become dependent on super-cheap clothes. It is a chain that is emblematic of the persistent strength of this type of merchandise in retail – both in a period of strong expansion and recession.

"Customers want exceptional value," said Oliver Chen, an analyst at Cowen. He said the country was attracting retailers where "price is part of their DNA".

Now, after 25 years, Old Navy has been so successful that it stands out from its parent company. Gap, Inc. (GPS) And while Old Navy will probably have a hard time surviving, its future is bright compared to Gap's prolonged slump.

The discount is king

Old Navy sales in stores open at least a year rose by 3% in 2018. And it is not the only discount retailer to expand, even due to the low unemployment rate and rising consumer prices. wages. Store sales open at least a year TJX (TJX)– the parent company of TJMaxx, Marshalls and HomeGoods – grew 6% during the holidays compared to last year.
Department stores are feeling the pressure of discounters. Macy & # 39; s (M), for example, opens new discounted Backstage stores in its larger sites.
Meanwhile, sales in stores open at least a year to Nordstrom & # 39; s (JWN) The full price line fell 1.6% during the holidays, while non-price Rack stores rose 4%.

"You can make great clothes that are not very expensive," Chen said about the industry.

Old Navy is so successful that it separates from Gap, its parent company.
Discount store chains also benefit from a shortness of time in the retail trade, leaving fewer choices for buyers to find cheap quality products. Bon-Ton has liquidated. Sears is alive. And Payless goes bankrupt.

Enter and exit

The Gap, a premium brand known for its jeans, sweatshirts and logo turtlenecks, is also fighting. And these problems have often overshadowed Old Navy's achievements.

"We found ourselves having to internally discuss what's right for Old Navy versus one of the other brands," financial director Teri List-Stoll said Thursday.

Old Navy and The Gap are moving in opposite directions and looking for different customers, which has led Gap to finally release its discount subsidiary.

The split, which Gap hopes to finalize in 2020, will allow Old Navy to open new stores in the United States and abroad to reach more thrifty customers, while also developing online. The company's other brands, including Gap, Banana Republic, Athleta and Hill City, will try to consolidate their high-income customers.

"It's largely real estate and location," said Susan Anderson, senior analyst at B. Riley FBR, about the split.

The Gap will close its Fifth Avenue store in New York
Old Navy, as well as TJX, Ross (ROST) and Burlington (BURL), are mainly located in shopping centers. The Gap is linked to traditional shopping centers, where traffic is slowing down.

In shopping malls, "it's easy to park, you go in, you choose what you want and you get out," Anderson said. "Consumers no longer want to wander through a shopping mall."

Old Navy direction

If Old Navy was the jewel of the Gap portfolio, the brand had its share of problems.
It collapsed in the late 2000s and saw a period of declining sales during and after the recession. In 2012, Stefan Larsson took the presidency of Old Navy. He revitalized the brand by focusing on families and presenting a fast fashionable model that helped him become the pioneer after a long tenure at H & M.

"Larsson is credited with introducing more fashion into the brand," while keeping prices down, said Tiffany Hogan, senior analyst at Kantar Consulting.

Sonia Syngal, who took office as CEO in 2016, will guide Old Navy in its next phase. She began her tenure at Gap more than ten years ago, having worked for the technology firm Sun Microsystems and Ford (F). Peck touted his "convincing results" to analysts on Thursday.
Old Navy, which opened its first stores in 1994, made sales of $ 1 billion in its first four years of sales by selling trendy and affordable clothing for parents and children.
"I took a step back and thought about what I wanted to do at age 35," Syngal told his alma mater, Kettering University, in 2016, about his decision to start selling at detail. "I have thought a lot about adolescence, designing and making my own clothes," she added. "I wanted to return to this creative environment."

Syngal refused an interview for this story through a spokeswoman for the company. But she previously said that she wanted the brand to appeal to a range of brand customers.

"It's about inclusion, democracy and democracy-style," she told ABC last year. Old Navy launched a "Size YES" campaign in 2018, which brought to 75 stores the large size collection, previously only online.

Future uncertain

Despite Syngal's success so far, she will still have some work to do.

Although Old Navy sales at stores that were open for at least a year were up from 2017, sales were flat during the holidays.

"The fourth quarter was disappointing, especially in the stores," List-Stoll told analysts. She said Old Navy "missed opportunities", and she blamed the weather on the gloomy vacation period.

Anderson, an analyst at B. Riley FBR, said that "it was a little eye opening as the last quarter slowed." She asked what Old Navy growth would get from opening new stores because more and more people are buying online.

If you separate from Gap, Old Navy loses the advantage of operating under a huge parent.

For example, Old Navy relies on Gap to help reduce costs and manage its operations. It manages common loyalty programs with Gap, shares customer data and even has a place on the Gap website.

"Old Navy is doing business, but taking advantage of the size of the parent company," said Simeon Siegel, an analyst at Nomura Instinet. "It does not put them in a stronger position."

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