Gap Inc. on Friday announced a deal with global licensing firm IMG, starting with three of its brands, Gap (which includes GapKids and babyGap), Banana Republic and the recently acquired Janie and Jack children's line.
Through the tie-up, the companies aim to develop cross-category product extensions — including baby equipment and baby care, home decor and textiles, and furniture — and market the brands to new audiences globally, according to a press release.
The news came as The Business of Fashion reported mass layoffs of some 10% of Gap Inc.'s workforce, mostly at its headquarters, including many of its design teams. Retail Dive's requests to Gap Inc. for comment regarding the report weren't immediately returned.
The apparel industry has been especially hard hit by the COVID-19 pandemic, as nonessential retail stores spent much of the past several weeks closed in order to promote social distancing, with their e-commerce ill equipped to make up for the lost sales.
That makes this licensing move understandable, as it is "a way for Gap to quickly and cheaply raise some money" at a time when it's under intense financial pressure, according to GlobalData Retail Managing Director Neil Saunders. But he warned that, longer term, it also could further erode the brands involved.
"The correct course of action would be to fix the problems with the various brands and then engage in brand extension," he told Retail Dive in an email. "Doing the latter before the former, has the potential to cause confusion and cheapen the image of the brands."
He also pushed back against statements made by IMG and Gap that called these brands "powerful," "strong, globally relevant" and "familiar, trusted and highly marketable across multiple demographics."
Saunders said, rather, that while Gap Inc.'s brands are indeed "well-known and recognized, all of them are somewhat tarnished," especially the namesake brand.
"While the company's brands are not hated, they are not loved either," he said. "The way Gap sees itself is increasingly out of line with the way consumers view it. This is a major problem that necessitates a dose of realism as a remedy. In short, all of Gap's efforts should be going into restoring the shine that was lost a long time ago not engaging in acts of desperation to increase income."
It could be too late. Gap Inc. is now operating in a climate of what Moody's analysts last week called "accelerated Darwinism for [the] retail and apparel sector."
"We will see the aggressive competitive trends that were permeating the retail landscape prior to the coronavirus intensify once the crisis has passed," analysts, led by Mickey Chadha, wrote in a May 1 report emailed to Retail Dive. "The larger competitors will double down on efforts to grab more market share and increase their e-commerce penetration. These larger, stronger and more diversified players will emerge emboldened as increasing numbers of the smaller, weaker, highly leveraged competitors fail."
Gap Inc. is arguably larger and somewhat diversified, but it's not all that strong. Early in the pandemic period the company furloughed workers, suspended stock repurchases, deferred and suspended dividends, reduced 2020 capital expenditures by about $300 million, cut executive pay, shifted inventory and tapped its entire $500 million revolving credit facility.
More recently Gap Inc. suffered further ratings downgrades after announcing the offer of new senior secured notes totaling nearly $2.3 billion. The company around then also said it wouldn't pay April rent and hinted that some stores wouldn't reopen. Indeed, last week MKM Partners Managing Director Roxanne Meyer said that permanent store closures at Gap's brands this year "could exceed well over 200," up from her team's previous estimate of 170.
"We expect [Gap Inc.] and many other over-stored and/or challenged retailers to take advantage of co-tenancy clauses that get activated over the next 12 months once malls reopen," she said in emailed comments.