Gap Inc. didn’t take long to replace Old Navy brand chief Nancy Green, who left unexpectedly in the spring after a series of supply chain and merchandising mishaps. But Monday’s announcement that former Walmart Canada CEO Horacio Barbeito will be arriving in a couple of weeks to take the reins at the value brand was overshadowed by the simultaneous, surprise report that Gap Inc. CEO Sonia Syngal is also leaving.
An employee at the company for nearly two decades, she rose to become Old Navy's CEO in 2016. In 2020, she replaced longtime Gap Inc. CEO Art Peck months after his abrupt ouster in 2019.
“Having just filled a sizable hole in its senior leadership team, [Gap Inc.] is now in the market once again, searching for a new CEO to help turn the business around,” Telsey Advisory Group analysts led by Dana Telsey said in emailed comments, noting “choppy performances across brands, uncertainties in leadership and direction, and a lack of visibility to stabilization with a clear plan for recovery.”
Green and Syngal had each previously held executive roles at Old Navy, so when Green returned to helm the brand and Syngal took over Gap Inc., most analysts expected the company to continue to benefit from the strength of Old Navy.
What the company got instead was newfound trouble at its top performers, and continued underperformance at Banana Republic and Gap.
Trouble — everywhere
Just ahead of Syngal’s move to Gap Inc. CEO, Old Navy had hit a rough patch, which helped to derail a plan to spin it off. But with Gap Inc. in dire need of a turnaround, analysts saw her operational savvy and longevity at the company as assets. Now, Old Navy is again stumbling badly, hobbled by supply chain woes unique to its operations and merchandising snafus largely of its own making.
“Unfortunately, these problems ... have resulted in chronic underperformance at Old Navy – which is usually the engine of growth,” GlobalData Managing Director Neil Saunders said in emailed comments. “Poor performance – which is well below market growth – over recent quarters has raised serious questions about the grip management has on operations.”
In addition to Old Navy, Gap Inc. under Syngal pinned a lot of hopes on Athleta. The brand lured Allyson Felix from Nike and took a stake in the Olympian’s brand, and continues to expand its footprint. Most recently Athleta expanded with a foray into outlet.
But the brand also recently faltered, as Q1 comps fell 7%.
“Athleta's growth profile has also seemingly hit a snag, [so] any ‘deep value’ thesis has likewise broke (for now),” Wells Fargo analysts led by Ike Boruchow said in emailed comments Monday.
That leaves Banana Republic, which has been a chronic underperformer, and the company’s namesake Gap brand.
The Gap brand has tumbled from its cultural peak in the 80s and 90s, and has failed to approach its former glory.
Revolving doors at the brand over the past few years meant the quick entrance and exit of creative directors, chief executive and marketing officers. Last year, the brand hitched its star to mercurial artist Ye for a Yeezy Gap collab that has had a series of spotty releases.
“I wouldn’t have thought that any line of Yeezy clothing would’ve been close to a solution of any sort for this brand, so, maybe falling on your sword after that incredibly blind move was best,” Lee Peterson, executive vice president of thought leadership and marketing at WD Partners, said by email regarding Syngal’s departure. “This is proof that it’s much worse than they’re all cheerfully letting on in terms of the challenge. Undoubtedly there is no easy fix, but this shows that there is no ‘hard fix’ either.”
A better collab would be with Levi’s, which, unlike Gap, remains popular with multiple generations and demographics and was Gap’s original raison d'être, Peterson said. “Get Gap to 100 stores and team up with Levi’s, like in the beginning — it’s their only hope,” he said, noting that operational chops is not what the brand requires. “They need a merchant.”
Who will replace Syngal in the long term is as-yet unknown, but with the appointment of Barbeito at Old Navy at least, the company is opting for change. At Walmart Canada, he “drove significant growth in the online business,” according to Gap Inc.’s press release Monday. During his 26 years at Walmart, he had leadership roles across merchandising, marketing, supply chain and store operations and has global experience in five countries.
“With extensive leadership experience in a similar customer demographic as [Old Navy], we believe Mr. Barbeito brings some relevant experience, though not in the apparel space,” Telsey said.
Some of the challenges Barbeito and Syngal’s successor face are not of Gap Inc’s making, but, rather, reflect the broader state of the apparel industry.
Gap’s troubles are apparel’s troubles, too
While Old Navy has had success in the past thanks to its value positioning, the market is saturated with the kind of clothing that it sells, with Walmart and Target in particular offering similar styles in basics at similarly low price points, if not lower, according to Kristin Bentz, president of KB Advisory Group.
“Walmart's even trying with all their different brands, and Target has so many fabulous brands, so if the pricing is right, why would you go to Old Navy? That value proposition I don't think is there,” she said by phone.
Moreover, inflation is hitting the value customer particularly hard, she said. This sets the sector up for a rough back-to-school season.
“You have to go to work and fill up the car, you have to feed your family, you have a rent increase,” Bentz said. “I don’t think they’ve budgeted for back to school. I think it’s much worse than people think. ”
Gap offers higher-quality basics compared to Old Navy, but younger consumers are less invested in quality, at least for new clothes, according to Bentz. “I feel like no one cares about quality,” she said. “And they're all about thrifting.”
More broadly, Gap Inc.’s warning of more markdowns, and margin pressure, to come, also signals trouble for the apparel sector, according to UBS analysts led by Jay Sole.
“[Gap Inc.’s] comment about a more promotional stance could have broader implications across mall-based and other retailers,” Sole said in emailed comments. “This could be indicative of another step up in promotional levels, in our view. Plus, the increase in promotions could put pressure on other apparel companies to follow suit or risk losing market share.”
Some of Athleta’s worries are likewise also apparel’s. While the brand’s core offer was a staple during the pandemic, that’s over now, Bentz said, adding that the economic climate calls into question the brand’s race to open stores.
“People are done with athleisure from the pandemic,” she said. “I know that's the jewel in their crown and I get what they're doing, like, at least it’s not Gap. But why would you want to do freestanding brick-and-mortar retail right now, in this recession? Which we’re in by the way?”
Banana Republic is a unique story in Gap’s portfolio right now. As people returned to work in their offices in the late stages of the pandemic, Banana Republic got a reprieve, actually becoming Gap Inc.’s best performer in Q1, with net sales up 24%, comps up 27%, and lower discounts helping margins.
But the brand continues to swim against the tide, as a newly hybrid workforce has even less of a need for office attire than before the pandemic. As with others, this problem for Banana Republic spells trouble for other apparel retailers as well.
Trouble — and toil
Just when Gap Inc. needs to make some bold moves, it’s without a chief executive.
“We hope that Gap will use the opportunity of Syngal’s exit to search for a new leader that can properly transform the business and not one who will make tweaks around the edges,” GlobalData’s Saunders said. “Any leader will need to be extremely strong to grapple with the Gap culture of inertia and a general unwillingness to change and innovate.”
To some extent, that goes for the entire apparel industry, which is wrestling with global macroeconomic issues precipitated or worsened by the ongoing pandemic, the war in Ukraine and other forces, according to McKinsey Senior Partner Achim Berg, speaking on a recent episode of the McKinsey Podcast.
“In this environment, which is much more volatile than what we have seen in the last 20 years, it’s very difficult to make the right bets,” Berg said.