by Talia Lambarki, MBA

The DuPont method of analysis is a method of measuring company performance that originated from the DuPont Corporation in the early 1900s. The operating efficiency (as measured by profit margin), asset use (as measured by total asset turnover), and financial leverage (as measured by equity) are analyzed to determine their effect on ROE. If the ROE is considered too low, the DuPont analysis can be used to identify the areas of underperformance.

A DuPont analysis of the Gap reveals the factors that contributed to the high ROE of 30%. In fact, the company maintained superior returns during the years 2008 through 2010. The average standard ROE is in the range of 12% to 15%. Gap’s ROE increased from 22% in 2008, to 23% in 2009, to 30% in 2010 (for a three-year average of 25%). The upward trend and high ROE for the three years indicates superior performance, which should attract investors to fund company projects that will further increase profitability.

In contrast, Abercrombie & Fitch and American Eagle suffered below average returns (ROE of 8% and 11%, respectively for the years 2008 through 2010). The returns of both companies also decreased from 2008 to 2009. If the Gap can sustain its strong financial stance, and even grow stronger, it will continue to be a formidable market leader in the United States.

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by Talia Lambarki, MBA

“The Gap, Inc. is a global specialty retailer offering apparel, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brands…The Company operates in two segments: Stores, which includes the results of the retail stores for Gap, Old Navy, and Banana Republic, and Direct, which includes the results for its online brands, both domestic and international.” (Gap Inc. 2011 Disclosure). The stores segment contributes 91% of net sales for the company, while the direct segment contributes 9%.

In 2007, total revenue from both segments was $15.8 billion, the gross profit was $5.7 billion, and net income was $833 million. In 2008, revenue declined to $14.5 billion, gross profit dropped to $5.5 billion, but the net profit rose to $967 million as a result of eliminating long-term debt, which was a strategy implemented in 2002, and opening franchised stores in the Middle East and Asia. The recession in the U.S. contributed to the decline of revenues. In 2009, revenues continued to decline to $14.2 billion. However, the gross profit rose to $5.7 billion, and the net profit rose to $1.1 billion. From there, revenue went on to increase by 3.3%, for a total of $14.7 billion by the end of year 2010. As a result, their net profit increased by about 9% to $12 billion.

It is in the best interest of Gap management to continue upward trends, especially since the company operates in such a competitive industry. However, revenue does not always trend upward, it fluctuates. There was a decline in revenue of about 0.8% or $14.5 billion for FY2011 compared to the prior year. Nonetheless, the company’s profitability can still be used to fuel further global expansion, product development and innovation, and advertising efforts for revenue growth.

by Talia Lambarki

Money does not grow on trees, so where is the source of it for Gap Inc.? “The Gap, Inc. is a global specialty retailer offering apparel, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brands. Most of the products sold under its brand names are designed by the Company and manufactured by independent sources. The Company also sells products that are designed and manufactured by branded third parties. The Company operates in two segments: Stores, which includes the results of the retail stores for Gap, Old Navy, and Banana Republic, and Direct, which includes the results for its online brands, both domestic and international. The Company has franchise agreements with unaffiliated franchisees to operate Gap and Banana Republic stores in many other countries around the world. Under these agreements, third parties operate or will operate stores that sell apparel and related products under its brand names” (Gap Inc. 2011 Disclosure). The stores segment contributes 91% of net sales for the company, while the direct segment contributes 9%.

The reporting segments can be further divided to analyze various aspects of the company. The stores reporting segment can be divided into regions of operation. The geographic regions are classified as the United States, Canada, Europe, Asia, and other. Geographical segmentation is based on the way business activities for retail stores are managed and evaluated. The direct reporting segment (online sales) has a different distribution method than the direct reporting segment and can be divided as international and domestic.

Records of store segment sales by region reveal that the highest percentage of net sales for the company comes from retail stores in the United States of 78.44%. Much smaller percentages of net sales are from Asia (7.85%), Canada (7.17%), Europe (5.88%), and other regions (0.67%).

Net sales for the Gap totaled approximately $14.7 million in FY2010 for both the stores and direct segments. The Gap experienced a 2% decline in sales from FY2008 to FY2009. However, there was revenue growth of 3% from FY2009 to FY2010. The gross profit margin slightly increased over the three years, indicating higher sales and/or decreases in the costs of goods sold. The operating profit margin trended upward with 10.9% in 2008, 12.8% in 2009, and 13.4% in 2010, revealing increased operating efficiencies. Also during the years 2008 through 2010, the Gap sustained higher net profit margins than Abercrombie & Fitch and American Eagle Outfitters and grew from 7% in FY2008 to 8% the following year and remained constant the year after.

It is in the best interest of Gap management to continue upward trends, especially since the company operates in such a competitive industry. Its profitability can be used to fuel global expansion, product development and innovation, and advertising efforts for continued revenue growth.

by Talia Lambarki, MBA

GAP

GAP (Photo credit: SimonQ錫濛譙)

Gap Inc. has a strong market presence domestically; however, it lags behind global competitors. One of its domestic competitors, TJX Companies, leads Gap globally in market share. The market shares of the top four companies, based on the revenues of each compared to the revenues of the industry segment, are used in the Herfindahl-Hirschman index to determine their sizes relative to and impacts on domestic and global markets.

Domestic Market Share

In the United States, 39.6% of the family clothing store industry (NAICS 44814) consists of four companies, which include Gap, TJX Companies, Ross Stores, and Abercrombie & Fitch. Total revenue for the industry was $85.8 billion in 2011. Gap Inc. holds the most dominant position in the industry, with a total domestic market share of 13.3%.

Even though Gap’s share of the whole market is a small piece of the pie, it has a strong hold on the market. The family clothing industry is very fragmented. Most companies (60.4% of them) hold a very small share of the market. This share may even be less than 1%. “Over 80% of firms operating within the industry employ four or fewer people, so no single company owns a substantial portion of the market” (IBISWorld Industry Reports). Therefore, a company, such as Gap, that represents 13.3% of the market is a formidable giant compared to the many smaller companies that represent less than 1% and are trying to compete.

Domestic Market Share

Source: IBISWorld Industry Report 44814 Family Clothing Stores in the U.S. December 2011.

Global Market Share

One way for companies to gain access to new customers is to expand into international markets. Global expansion is an attractive option when home markets are mature such as the family clothing stores industry in which the Gap operates. The global apparel retail industry had revenues totaling $1,031.5 billion in 2009, based on the most current global industry report. According to Datamonitor, the four major global competitors in the industry are the TJX Companies Inc with $19 billion in revenue (1.8%), H&M Hennes & Mauritz AB with $15.49 billion in revenue (1.5%), Gap Inc with $14.526 billion in revenue (1.4%), and Levi Strauss & Co with $4.023 billion in revenue (0.39%).

Global Market Share

Source: Datamonitor, Industry Profile, Global Apparel Retail, Publication Date December 2010.

Herfindahl-Hirschman Index: U.S. Family Clothing Stores

The Herfindahl-Hirschman index (HHI) is used to compare the size of firms in relation to the industry. The index indicates the level of competition among the firms in the industry. The HHI is defined as the sum of the squares of the largest firms by market share within the industry. The highest HHI value is 10,000, which indicates a monopoly.

A decrease in the number of competitors results in an increase in the HHI value for a firm. Likewise, an increase in the number of competitors decreases the HHI.

Using the four major players in the family clothing stores industry (Gap, TJX Companies, Ross Stores, and Abercrombie & Fitch) the HHI is calculated as follows:

HHI = 13.32 + 12.52 + 9.82 + 4.02

HHI = 176.89 + 156.25 + 96.04 + 16

HHI = 445.18

The value of 445.18 out of 10,000 indicates that the industry is very competitive, having few dominant players. As the industry expands and grows more competitive (firms enter the industry), the HHI decreases.

Herfindahl-Hirschman Index: Global Apparel Retail

The Herfindahl-Hirschman Index (HHI) can also be used to measure the size of firms in the global industry. Using the four major players, the HHI for the global apparel retail industry is calculated as follows:

HHI = 1.82 + 1.52 + 1.42 + 0.392

HHI = 3.24 + 2.25 + 1.96 + 0.15

HHI = 7.6

An HHI value of 7.6 indicates the global retail industry is very competitive, having many participants without any significant dominance. The global industry is over 58 times more competitive than the domestic market, which places much higher on the HHI (at 445.18).

Bridging the Gap

By further leveraging its competitively valuable resources and increasing its capabilities, it is possible for the Gap to extend its market-leading position in its domestic market into a position of global leadership. It is becoming increasingly important for many firms to expand their global presence or enter into global markets to remain competitive and stay afloat. Accordingly, the Gap is continuing to expand its global market share. In 2009, the company had plans of doubling its revenue from $1 million to $2 million. By the end of 2011, it was on track toward realizing that goal and bridging the gap between its domestic and global positioning.

by Talia Lambarki, MBA

 

A SWOT analysis of Gap Inc. revealed gaps in their armor that may render the firm unable to sustain attacks from competitors, the economy, and other forces working against it. A SWOT analysis is a tool used to examine a firm’s resources and capabilities by assessing the strengths, weaknesses, opportunities, and threats of the firm.

Gap Inc. is a specialty retailer offering clothing and accessories for men, women, and children. Brands include Gap, Banana Republic, Old Navy, Piperlime, and Athleta. The company was strong and became a retail giant, using its strengths to its advantage and seizing opportunities, but it is now struggling in the midst of economic turmoil and additional threats to its existence.

Strengths

Weaknesses

Global presence brought about by franchise and company-owned stores and an online presence

  • As of 1/29/2011, 11.5% of company-owned stores exist internationally; in comparison, Abercrombie & Fitch Co. operates only 3.5% of total stores outside North America and American Eagle Outfitters, Inc. stores are only located in North America
  • Total company-owned stores of 3,068 as of same date is almost triple that of Abercrombie and American Eagle
  • International shipping via online outlets is available through Gap to 90 countries;  American Eagle reaches consumers in 75 countries via e-commerce; Abercrombie has worldwide brand recognition with nearly 10% of net sales from online sales, but online sales have less global reach than Gap’s international global network

Well-balanced product portfolio

  • Balanced portfolio of brands that target shoppers looking for value, upscale brands, or both with an extensive range of clothing styles
  • Abercrombie has a good portfolio of established brands, but lacks the value/outlet retailing of Gap; American Eagle also has strong brand image, but their target customer base is limited to the youth target market, relying heavily on teens; American Eagle has neither offerings for value conscious shoppers nor upscale brand offerings

Strong margins compared to competitors

  • High operating and net profit margins of 13.4% and 8.2%, respectively, as of year ending 1/29/11; highest among competitors
  • Increase in operating and net profit margins of 4.9% and 5.8%, respectively, compared to prior year
Product supply dependent on outside merchandise vendors

  • Gap relies heavily on its 1,020 vendors for merchandise
  • Independent third-party manufacturers face increasing prices in commodities, such as cotton, that will increase Gap’s costs
  • More dependent on vendors than its competitors Abercrombie, which purchases merchandise from approximately 191 vendors, and American Eagle, which purchases merchandise from foreign suppliers through a single buying agent and does not maintain exclusive agreements to purchase from any particular vendor

Low store productivity

  • Net decrease in total company-owned stores from 2009 to 2010 years end (decrease of 27 stores from 52 in North America and increase of 25 stores abroad)
  • Lower store productivity than American Eagle, which has focused on franchise agreements to open more international stores

Information technology support and operations reliant upon IBM agreement

  • Gap continues to implement upgrades to IT systems; upgrades have associated inherent risks
  • Gap is unable to guarantee the security and integrity of company data due to its agreement with IBM to operate significant aspects of the IT infrastructure, which requires IBM to access internal company information
  • Competitor American Eagle has a strong digital strategy and e-commerce operation; initiatives have erased boundaries between the company and its customers

Slow to keep pace with fashion trends and changing consumer preferences

  • Gap’s lead times for purchases are long; however, success in the industry depends on a company’s ability to keep up with the fashion tastes of consumers
  • Gap has been unable to ensure that fashion items are consistent with current consumer preferences
  • Abercrombie keeps up with the quickly changing trends of a younger target market, while American Eagle has established itself as a fast fashion retailer and is considered one of the most valuable retail brands in the US

Opportunities

Threats

Expanding presence in key growth markets

  • The Gap is the market leader, consisting of 13.3% of the collective 40% of top 4 domestic family-clothing stores; Abercrombie accounts for about 4% of total domestic industry revenue; American Eagle accounts for about 1% of total domestic industry revenue.
  • In 2011, Gap opened its first four wholly owned stores in China where retail sales are growing at a fast pace due to economic development

Growing market in the US and UK for plus size apparel

  • The plus size apparel market in the US accounted for 54% of the total US clothing market in 2009; the growing number of customers that fall in the plus size category will further drive sales higher
  • Gap can seize the opportunity to serve the growing plus size market by expanding the plus size selections of its brands; Abercrombie’s women’s clothing line only ranges from sizes extra small (XS) to large (L); American Eagle has limited selections of women’s clothing in size double-extra large (XXL)

Positive trends experienced by online channel

  • E-commerce, which helps retailers keep costs low, has been on the rise globally and is becoming the most customer-preferred channel for purchases
  • Gap operates an online store and offers international shipping to 90 countries; Gap also offers the convenience of shopping for all brands on one website, with flat-rate shipping
  • Positive trends in online retail will help Gap continue to expand its online presence to remain competitive (American Eagle reaches consumers in 75 countries through its online channels and was ranked the second best mobile retailer in 2009, while Abercrombie has been enhancing its online presence in recent years, including its web-based store for the Gilly Hicks brand)
Weak consumer spending in Europe and the United States

  • High unemployment rates in both the US and Europe, where the Gap derived 84.3% of its revenue in fiscal year 2010, could negatively impact the upscale brands of Gap, Banana Republic, and Piperlime
  • The high unemployment rate and credit crunch also adversely affects competitors Abercrombie and American Eagle especially since their target consumers (teens) have the highest unemployment rate, resulting in less spending on fashion

Margins affected by high input costs

  • Gross profit margin in FY10 decreased by 0.4% from prior year to 40.2%; Abercrombie fares better with a margin of 63.8%
  • High cotton prices are a concern, as Gap could be required to raise prices of merchandise, which would deter price-conscious consumers
  • Since clothing is made of the same inputs, competitors face the same high input costs

Growing market for counterfeit products

  • US economy suffers a minimum loss of $200 billion in revenue and 750,000 jobs annually from the sale of counterfeit goods;  Europe’s market for counterfeit goods is worth about $8.2 billion
  • Gap, Abercrombie, and American Eagle carry branded merchandise that is vulnerable to counterfeiting

High levels of competition in the family-clothing stores industry

  • Number of firms engaged in family clothes retailing has increased at an annual average rate of 3.0% per year over the past five years
  • Expansion of low-priced retailers during recession period has boosted the overall expansion of the family-clothing market over the past 5 years
  • Gap is better positioned to compete against the expansion of low-priced retailers compared to Abercrombie and American Eagle due to its Old Navy stores as well as Gap and Banana Republic Outlet stores

Failure of vendors to adhere to vendor codes of conduct

  • Vendors are required to adhere to vendor codes of conduct, but failure to comply could negatively impact the company
  • Abercrombie and American Eagle face similar threat due to their reliance on third-party vendors

Sources: IBIS World US Industry Reports;Datamonitor reports for The Gap, Inc., Abercrombie & Fitch Co., and American Eagle Outfitters, Inc; FY10 and FY09 10K company reports; www.gapinc.com,www.abercrombie.com, and www.ae.com

 

Gap Inc. has more weaknesses and threats than strengths and opportunities according to the above SWOT analysis. The threats the company is up against could be detrimental to the firm, and the firm may not be able to improve in its areas of weakness. However, its initiatives to expand globally in key growth markets and its growing online presence can help the company to sustain a competitive advantage for years to come.

Jesús Sanz, Director General, Casa Asia, Spain...

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Some people are annoyed by the increase of socially acceptable, also known as politically correct or socially sensitive, terms because they are constantly changing and sometimes address unimportant issues. However, there are many terms that address relevant issues and concerns, and therefore, every effort should be made to keep one’s vocabulary of socially correct terms current.

What has caused such a widespread concern over socially acceptable terms? Besides wanting to be considered socially sensitive, why should individuals be concerned with using appropriate terms?

There are several factors that caused the concern over the usage of socially correct terms. Some factors include the evolution of demographics and culture and increased social awareness.

Demographics and Culture: The demographics of the United States are continually evolving. There is a greater number of immigrants now than prior years, and the nation is a more diverse melting pot. Beliefs and attitudes are now greatly influenced by other cultures.

Furthermore, the age distribution across the nation has also affected culture. The nation is mostly composed of Baby Boomers (those born from 1946 to 1954 whose ages range from 56 to 64 in 2010). Their values have shaped the overall values of the culture in the United States. They lead the causes of Greenpeace, civil rights, and human rights. Following the Baby Boomer generation is Generation X, which accepts cultural diversity. The latest generation, Generation N, is idealistic and social-cause oriented.

These generations have organized movements and their experiences have shaped their perceptions of what is considered a normal lifestyle, which varies among generations. These demographic and cultural changes have presented new challenges in government, educational institutions, and the work place.

Social Awareness: Underrepresented groups and the organizations that represent them have identified issues that affect them and addressed their concerns. Advancements in sociological/societal research have provided the opportunities and resources to improve interpersonal relationships through communication. Now, public and private institutions, the government, and individuals are expected to be aware of these advancements.

To address some issues, new laws have been enacted. Society is now required to accommodate those who were once ignored. For example, the gay rights movement has given rise to new laws, and company facilities are required to accommodate individuals with physical challenges.

With these developments, individuals are expected and sometimes required to know how to effectively communicate with others without being offensive or using socially unacceptable terms. Executives and managers, the highly educated, sophisticated individuals, etc., are expected to maintain a certain level of knowledge, understanding, and awareness of the world. Individuals often use speech to express professionalism and assess the professionalism of others. If being viewed as a polished, well-learned, or sophisticated individual is not motivating enough to use acceptable terms, then perhaps avoiding a lawsuit, lost customers, or job termination would suffice as proper motivation.

Many people misrepresent themselves to others by using the wrong words. Perhaps the terms used have negative connotations or better terms could have been chosen that more accurately express the sentiments of the speaker. Perhaps the speaker, who has not kept abreast social developments, inadvertently expresses views that exclude the experiences of others. Many embarrassing or troublesome situations can be avoided by becoming aware of various experiences and, at the least, knowing which terms are generally acceptable.

Ways to Avoid Committing Offense:

  • Gain awareness of societal issues by reading newspapers and listening to the news. However, use caution when reading the news on the Internet and comments from readers. Content from these sources may perpetuate terms, phrases, and prejudicial ideas that are offensive.
  • Pay attention to the terms used by reputable sources. Broadcasters, journalists, reporters, etc. are usually careful not to offend the public.
  • Get the opinions of those who are within an underrepresented group to determine what terms they prefer.
  • Become acquainted with and use the terms considered acceptable from reputable sources.
  • Monitor changes in what is considered socially acceptable by periodically consulting reputable sources.

By Talia Lambarki

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November 13, 2010

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