Iconic retailer Gap Inc. said it would close 350 stores by 2023 across its namesake and Banana Republic brands, a decision that is expected to reduce its mall-based locations by an estimated 80%.
The nation’s largest apparel retailer said Thursday at least 225 of those locations are expected to close before the end of the year, with an additional 75 closures scheduled for 2021. As the company pulls back on locations for its unprofitable brands, it said it plans to move forward with openings for its successful ones — Athleta and Old Navy — as the two steadily contribute a larger portion of the company’s total revenue.
The drastic changes to its brick-and-mortar footprint, which were announced at a virtual investor event, come as the San Francisco-based company scrambles to retool its real estate portfolio amid a yearlong slump in sales and the ongoing coronavirus pandemic.
“We were overly reliant on low productivity, high-rent stores,” Mark Breitbard, Gap’s new president and CEO, told investors. “We will be shrinking our North America footprint and getting out of mall-based locations, and by 2023, we will have reduced our store fleet by 35%. The goal is to create a new operating model in a cost-effective way, and all of the changes will help us become a digitally-led brand.”
Gap Inc. oversees brands including Gap, Banana Republic, Athleta, Old Navy, Janie & Jack, and Intermix. Its latest announcement is the retailer’s most aggressive push in its decades-long history to shift its Gap and Banana Republic business away from brick-and-mortar stores. The company had been struggling long before the pandemic against steep revenue declines, rising e-commerce competition, and declining mall traffic, which sent the number of Gap and Banana Republic stores nosediving over the past half-decade.
The company has shrunk Gap and Banana Republic’s footprint to what is expected to be fewer than 1,420 by this year’s end, from 1,843 stores in 2018. At the beginning of this year, the company had planned to close 90 Gap and Banana Republic locations.
The firm’s dramatic increase in closings for those brands is another sign of how much retailers nationwide are struggling right now. The industry is responding to the financial distress of the pandemic by cutting back on real estate expenses and closing locations at a pace that is expected to make 2020 a record year for store closings, according to a CoStar Market Analytics report on the national retail real estate market.
Gap’s retreat from mall-based locations could be a hefty blow for retail landlords already struggling with declining foot traffic.
The chain plans to use the current healthcare and financial crisis as a springboard for its real estate restructuring plans.
Gap Inc.’s Chief Financial Officer Katrina O’Connell told investors that the brand had “not had great execution over the past several years,” but the company will use current market conditions to reallocate its fixed expenses in rent and shift its resources to the retailer’s growing digital operations.
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In the early stages of the virus’ outbreak across the United States, the retailer said it was forced to push most of its business to digital operations as a result of lockdowns and in-store restrictions. Most of the company’s 3,000 stores have since reopened, but after reporting a 165% leap in e-commerce sales compared to last year, Gap Inc. plans to continue to shift most of its future growth to expanded digital operations.
A majority of Gap Inc.’s anticipated closures will be timed with lease expirations, but the retailer estimates it will have to spend about $210 million to buy out some of those agreements. O’Connell said the company is also aggressively renegotiating lease terms for stores that will remain open, a move that will save the company about $45 million annually.
“Lease buy-out costs and rent reductions are all specific to our real estate restructuring efforts,” the CFO said, adding that the company is also exploring whether it should exit the European market entirely or shift its locations there over to a franchise model.
But the company’s plan to shrink its real estate costs has already hit a few brick walls. The company has been tangled in several lawsuits over the past five months with prominent landlords including Simon Property Group, which is Gap’s largest landlord, and Brookfield over its rental obligations. Simon is suing for $65.9 million in unpaid rent and has countersued Gap’s request for renegotiated rental terms for “taking opportunistic advantage” of the coronavirus’s devastating economic effect.
Gap’s store closure roadmap has already resulted in permanently vacating its 29,043-square-foot San Francisco flagship at 870 Market St. Back in August, the company confirmed it had emptied more than 47,230 square feet of retail space in the city after closing the flagship as well as other locations at the outdoor Embarcadero Centre and indoor Stonestown Mall.
Gap Inc.’s shift from physical space to stronger e-commerce growth will coincide with another transition over the next three years: Old Navy and Athleta’s increasing prominence as the company’s most profitable brands.
Since the pandemic’s outbreak in March, Old Navy has benefited from customers looking for lower price points, while Athleta’s athleisure and loungewear clothing has fueled the brand’s plan to more than double its current $1 billion in annual revenue by 2023.
Shawn Curran, the retailer’s chief operating officer, said Thursday that the company would be shifting its brick-and-mortar footprint to more Old Navy and Athleta locations over the next several years. By 2023, the two companies will make up about 70% of Gap Inc.’s total revenue, a significant increase from their current 55% annual contribution. Revenue from all of the company’s brands last year totaled $16 billion.
While the pandemic has slowed down Old Navy’s store expansion plans, the brand expects to open about 30 to 40 new stores each year through 2023. It currently operates about 1,200 locations.
“Stores matter and will remain an important underpinning to our business,” Old Navy CEO Nancy Green said, adding that “current market conditions will slow the brand’s opening pace. We’ll target new stores in smaller markets as an alternative to big-box competitors, and opening in smaller markets will minimize cannibalization of other locations.”
Athleta, which currently operates a “highly profitable fleet” of 200 stores,” will also continue to expand its brick-and-mortar footprint.
Mary Beth Laughton, the brand’s CEO, didn’t include details as to where and how many, but said physical locations were “top customer acquisition and brand-awareness vehicles that serve as an important role in local communities,” adding that the brand has an “under-penetrated real estate footprint.”
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