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  • The massive clothing retailer Gap Inc.,

  • parent company of several brands including

  • its original Gap stores, is breaking up.

  • Some big news out of the company with plans

  • to separate into two separate companies,

  • spinning off a yet to be named company,

  • NewCo, which will consist of The Gap brand,

  • Athleta, Banana Republic, Intermix, and Hill

  • City.

  • Then the remaining company will be Old Navy.

  • Gap's net sales slowed at the turn of the

  • 21st century, well before the financial

  • crash of 2007 devastated the retail

  • industry. Over a decade later, Gap Inc.

  • continues to struggle.

  • This is largely due to the Banana Republic

  • brand and the original Gap stores, which

  • haven't recaptured the explosive success

  • they cultivated in the 1990s.

  • For the last few years, Old Navy and the

  • athleisure brand Athleta have carried the

  • company.

  • Both have shown consistent year-over-year

  • sales growth post-recession.

  • Gap stocks surged by over 20 percent the day

  • the news broke as investors and analysts

  • applauded the move.

  • Frankly, it's about time.

  • Old Navy is a nice business, 3 percent same

  • store sales growth, in spite of an anemic

  • fourth quarter.

  • Now it'll finally be able to free grow on

  • its own, with its laser like focus I think

  • it can beat the 3 percent.

  • But others are skeptical, calling it simply a

  • move to boost the value of Old Navy.

  • My initial instinct was that this was a move

  • for valuation, meaning that Old Navy's

  • valuation was probably a little depressed

  • being inside of Gap Inc.

  • They've had to do something to get the stock

  • higher. This feels like that something to

  • get the stock higher.

  • But this is about the stock.

  • This is not about the company.

  • Whatever the future holds for Gap, this is a

  • stunning move for a company that grew from a

  • single store in San Francisco to become the

  • defining apparel retailer of the 1980s and

  • 90s.

  • The first Gap store opened as The Gap in San

  • Francisco in 1969.

  • The store's name was a reference to the

  • generation Gap between the young, liberal

  • baby boomers and their conservative, postwar

  • parents. Hoping to entice the huge baby

  • boomer generation, The Gap's founders Donald

  • and Doris Fisher decided to sell nothing but

  • records, tapes, and wildly popular Levi's

  • jeans. Jeans, especially Levi's, boomed in

  • the 1960s and 70s due to what fashion

  • historians call the casualization of the

  • American wardrobe after World War Two.

  • People didn't look sloppy, but they certainly

  • adopted more casual bottom elements into

  • their wardrobe.

  • It was this very clean, simple approach to

  • getting dressed.

  • The Gap was an immediate success.

  • By 1972 it had twenty five stores, including

  • one across the country in New Jersey.

  • In 1973, it began offering other brands

  • besides Levi's, as well as its own Gap

  • label. By 1975, it had 186 stores in 21

  • states and sales of 100 million dollars.

  • It went public the next year.

  • Donald Fisher appointed Mickey Drexler as

  • Chief Operating Officer and President in

  • 1983. Under his leadership, The Gap saw

  • explosive growth throughout the next two

  • decades.

  • Under the leadership of Mickey Drexler

  • through the 80s and 90s, Gap used to be the

  • premium growth retailer in America.

  • At the time it was smart, even hip

  • as my parents would have said.

  • The Gap expanded its own brands, founding

  • Gap Kids, Baby Gap, and Gap Outlet stores.

  • It even dropped Levi's, the only product it

  • sold in the original Gap stores, in 1991.

  • It also expanded beyond The Gap label by

  • acquiring Banana Republic in 1983 and

  • launching its discount brand Old Navy in

  • 1994. With these, The Gap targeted three

  • tiers of consumers: Banana Republic for the

  • upscale, Old Navy for discount shoppers, and

  • The Gap for everyone in between.

  • Old Navy in particular took off, reaching 1

  • billion in sales by 1997.

  • I was in store number one for Old Navy and I

  • remember walking out, calling

  • back, and saying to my boss

  • I've just been in the coolest, cheapest

  • store on the face of the earth.

  • And Old Navy was back in those days.

  • They were the fastest retailer to go

  • from zero dollars in sales to a billion

  • dollars in sales.

  • The company simultaneously expanded

  • worldwide. It opened the first international

  • Gap store in England in 1987 and expanded to

  • France and Japan in the 90s.

  • Finally, The Gap embodied the casual-cool,

  • basic trends of the 80s and 90s.

  • The casualization of the American wardrobe

  • continued into these decades as offices

  • began allowing increasingly casual attire.

  • Where The Gap really kind of took off was

  • casualization in the office.

  • The last leg of casualization came really

  • when people started wearing khakis to work

  • on Friday.

  • Casual Friday is the easiest way to think

  • about that.

  • The Gap made improbable clothing, like khakis

  • and turtlenecks, cool.

  • In 1993, it released an ad campaign

  • featuring dozens of celebrities in khakis.

  • A few years later, actress Sharon Stone wore

  • a Gap turtleneck with an Armani jacket to

  • the 1996 Oscars.

  • Gap's annual sales grew from 307 million in

  • 1980 to over one billion just seven years later.

  • By 2001, sales had ballooned to 13.8

  • billion.

  • When you adjust for stocks, Gap traded for 20

  • cents when Drexler took over in 1983 and

  • peaked at 52 dollars in 2000.

  • Wow, what a spectacular run, with the last

  • big leap coming from the rapid expansion of

  • Old Navy right before the turn of the

  • century.

  • At that time, though, the U.S.

  • economy slowed down.

  • The Gap's sales grew at 28 and 17 percent in

  • 1999 and 2000, but slowed to 1 percent in

  • 2001. It hasn't hit double digits since.

  • But a sluggish national economy was only

  • part of the problem.

  • First, by the early 2000s, Gap's apparel had

  • lost its cool.

  • Casual basics gave way to Britney

  • Spears-esque low-ride pants and crop tops,

  • which weren't Gap's forte.

  • Banana Republic and Old Navy carried the

  • company as The Gap brand struggled to

  • deliver what consumers wanted.

  • Next, the boardroom was in turmoil.

  • In 2002, then-CEO Mickey Drexler retired

  • after two years of sluggish growth.

  • Drexler's design-driven leadership had

  • faltered when trends changed in the early

  • 2000s. The company replaced Drexler with

  • Paul Pressler, a former Walt Disney

  • executive. Pressler used the cost-cutting

  • ethos he developed at Disney to improve

  • Gap's efficiency.

  • It seemed to work.

  • Sales growth rebounded to 9.7

  • percent in 2003.

  • But a New York magazine profile from the

  • time noted that this uptick was likely due

  • to products that Drexler chose before his

  • departure. And it didn't last: sales growth

  • fell back to under 3 percent the next year,

  • then slipped into the negatives.

  • Glenn Murphy, former CEO of the Canadian

  • drugstore chain Shoppers Drug Mart, took

  • over in 2007.

  • CNBC reported at the time that Murphy

  • planned to give the design team creative

  • freedom, reflecting Gap's continuing

  • struggle to be cool again.

  • As sales in the U.S.

  • fell, Gap again pursued growth abroad at a

  • much faster pace than in the 80s and 90s.

  • From 2006 to 2008, the company opened dozens

  • of Gap and Banana Republic stores across the

  • Middle East and Southeast Asia.

  • But then of course, the Great Recession

  • devastated Gap and just about every other

  • retailer. Whether The Gap was cool or not

  • hardly mattered.

  • Consumers slowed or halted apparel shopping

  • to save money.

  • Under Murphy's leadership, The Gap tried

  • several methods to revive sales.

  • It embraced strategies to integrate digital

  • and physical shopping experiences, like

  • allowing customers to shop online and pick

  • up items in store.

  • Gap also acquired two new companies:

  • Intermix, a women's fashion brand, and

  • Athleta, a fitness and athleisure brand.

  • Athleta in particular, capitalizing on the

  • spike in athleisure's popularity, has

  • succeeded where other Gap brands have

  • struggled. From 2008, when Gap acquired the

  • brand for 150 million dollars in cash, to

  • 2014, the Athleisure brand grew from an

  • online-only presence to about 80 stores.

  • Gap doesn't break out Athleta's sales

  • numbers specifically, but the other portion

  • of its revenue, of which Athleta is a part,

  • consistently posts the best sales growth in

  • the company.

  • During Murphy's leadership, Gap's overall

  • sales trended upward again, reaching a peak

  • of 8 percent growth in 2012.

  • But Murphy stepped down in 2014 and sales

  • drifted downward once again.

  • The company hasn't yet released its 2019,

  • earnings but sales at Gap stores fell every

  • year from 2013 to 2017, and Banana Republic

  • fared just as poorly.

  • Millennials have flocked to digitally-native

  • brands like Everlane, fast-fashion giants

  • like H&M, or even secondhand companies like

  • ThredUp. Fast-fashion retailers in

  • particular have captured a rapid fire

  • wardrobe replacement rate driven by social media.

  • And I've seen it dozens of times in the mall

  • where people are shopping and they already

  • own a ton of clothing in their wardrobe.

  • But things have already been all over social media and so they don't want to wear it again.

  • Old Navy and Athleta have carried the company

  • for the last few years.

  • To expand on Athleta's success, Gap launched

  • a men's athleisure line, Hill City, in 2018.

  • Meanwhile, Old Navy leans on its

  • family-friendly prices and shopping experience.

  • They know how to really integrate the right

  • fashion of the moment for their customer at the right price.

  • And I think they are doing a great job.

  • Old Navy is of particular importance to the

  • company, making up over 40 percent of its sales since 2014.

  • By 2020 though, the discount brand will

  • become its own company.

  • This will leave The Gap with two struggling

  • behemoths, The Gap and Banana Republic

  • brands, and a mixture of much smaller

  • brands: Intermix, Athleta, Hill City, and

  • the newly-acquired children's clothing line

  • Janie and Jack.

  • Analysts point to Athleta as the brand with

  • the most potential to drive future growth.

  • I think that a lot of people would have

  • assumed Athleta would have been grouped with

  • Old Navy. It will be the crowned jewel, it

  • will need to carry, it will represent the

  • growth. But it's also going to be benefiting

  • by being part of a larger company.

  • Gap's current CEO, Art Peck, said the split,

  • which should be complete by 2020, will help

  • each company craft a "sharpened and

  • strategic focus and tailored operating

  • structure." But why now, when the retailer