It’s possible America’s most iconic retailer might not survive this

Once upon a time, The Gap was the brand. The brand that Spike Lee and Madonna and Missy Elliot and Picasso would all front for in ad campaigns. That Sharon Stone would wear to the Oscars. It was a generational reference point — of course that’s where Janeane Garofalo’s character worked in Reality Bites — and it somehow made khakis cool. At its peak, circa 2000, The Gap morphed from a mall retailer hawking T-shirts and denim into a new vision of affordable “casual chic,” and no less than “an international arbiter of style and a global megabrand.”

But that world, of course, has been fading away for a while, and now looks to be ending altogether. This past March, an estimated 250,000-plus non-“essential” stores closed en masse across the country in the second half of the month, a catastrophe for retail. The apparel category in particular was brutalized, with sales down over 50%. And here’s the thing: April will almost certainly be worse.

The pandemic crisis has accelerated a brick-and-mortar “retail apocalypse” already in progress. Traditional retailers closed something like 9,000 locations last year, and well-known brands are already filing for bankruptcy.

So just how bad can it get? Could even The Gap disappear?

Late last week, Gap Inc. warned that it had blown through about half that cash, thanks to its largely idle store fleet, and had thus raised $2.25 billion in secured (junk-rated) debt and other financial maneuvers.

Just a week ago, the question might have seemed outlandish. The Gap brand is a ubiquitous and iconic presence around the world. And despite the onset of the coronavirus, its parent, Gap Inc. — whose other brands include Old Navy, Banana Republic, and newcomer Athleta — had a balance sheet judged to be “in decent shape,” compared to some of its retail brethren. As recently as an April 9 investor conference call, the company noted that it entered the quarter starting in February carrying $1.7 billion in cash.

But then, late last week, Gap Inc. warned that it had blown through about half that cash, thanks to its largely idle store fleet, and had thus raised $2.25 billion in secured (junk-rated) debt and other financial maneuvers. The company also noted it had skipped $115 million in April rent payments, and was continuing to negotiate with landlords. Both Moody’s and S&P Global downgraded Gap’s debt rating. Its shares, which traded above $18 at the start of 2020, sank below $7.

Nobody is predicting that The Gap, let alone Gap Inc., will disappear tomorrow. But suddenly that eventual outcome seems more plausible than ever: Imagine lingering consumer skittishness as unemployment reaches Great Depression levels; cascading real-estate woes as malls can’t collect enough rent from bankrupt retailers; massive inventory hoards combined with supply chain tie-ups; and a second wave of the virus that brings back lockdowns just before the crucial holiday season.

Retailers are in a “radically different position” than they were just a couple of months ago, says Jordan Elkind, vice president of product marketing at consumer data analytics firm Amperity, which works with a number of major brands: Instead of figuring out which locations to close, they’re deciding which to bother reopening. He declined to comment on The Gap specifically, but continued: “We’ve been in scenario planning and war-room sessions where the calculus has flipped. Now it’s ‘If we were to only reopen 25 stores of the 300 we had, what would the top 25 be — or the top 50 or 100?’” Many of his firm’s clients, he continued, “view this as a kind of reset.”

It’s a grim scenario that will reconfigure and even take down plenty of familiar retail brands. Could even the once-mighty Gap be among them?

Well before the pandemic came along, traditional retail was already fighting for its future. Malls were drastically overbuilt and vulnerable. Online retailers from the mighty Amazon to a swarm of well-funded, even if not always well-conceived direct-to-consumer startup brands were altering consumer habits, offering more choice, convenience, and cheaper prices. Thus familiar retail names were already flirting with disaster. Pier 1 Imports filed for a Chapter 11 bankruptcy last year, shutting down half its locations. Forever 21, the seemingly invincible face of fast-fashion, went bankrupt, too. Sears, basically the Amazon of the 20th century, has been disintegrating for years, closing stores and attempting a series of reorganizations. Barneys, the once-hot luxury department store group, was outright liquidated.

“This is accelerating pre-existing trends,” says Andrew Lipsman, principal analyst at eMarketer. “Already a lot of mall-based retailers were in a tough spot — and those are the ones that are going to take the toughest hit.”

Gap Inc., hardly immune to those overarching trends, ended an eventful 2019 (its fiscal year runs February 1 to January 31) with mixed results. Old Navy has long been the company’s star brand, but its sales stalled, and a plan to spin it off through an IPO was canceled this past January. The parent company CEO and other top executives were replaced, and so was the leadership of the Gap brand division. In a March earnings call, the company admitted 2019 had been a “challenging and disappointing year” in general, and for Gap brand, with a 5% decline in same-store sales, in particular. The company closed 141 Gap locations globally in 2019, and planned to close about 170 more in the year ahead; this continued a long trend, as the brand has steadily dwindled from about 1,300 North American locations in 2007 to roughly half that today.

But Gap brand sales fell both in North America and globally. Mark A. Cohen, director of retail studies at Columbia Business School, thinks the brand is more vulnerable than many realize. “The Gap is obviously an iconic brand that should have been in a catbird seat right up until this pandemic,” he says, “but in fact as a brand it has been failing for years.”

It’s certainly a brand with an enviable heritage. Founded in 1969 as a single store selling Levi’s and albums, it became synonymous with denim as a youth signifier (its name referenced the “generation gap”), eventually opting to build and exclusively sell its own brand. In its 1990s heyday under CEO Mickey Drexler, it transitioned and expanded beyond denim to a range of basics like T-shirts and khakis, making them totems of a modern and casual cool. The company’s Banana Republic brand thrived, and it successfully launched the lower-end Old Navy.

But as its momentum stalled in the early 2000s, Drexler was ousted, and the flagship in particular never quite recovered. It fell into a no-man’s land in a retail landscape filled with highs and lows: retailers like Target and Uniqlo dominated basics, while brands like Zara and Madewell captured the imagination of women who wanted fashion. The Gap, in trying to become all of those things, eventually became none of them. Indeed, if it had actually spun off Old Navy, Columbia’s Cohen argues, the Gap business would have been “a nonviable stub.”

True Religion, the once-red-hot denim brand, has filed for Chapter 11 bankruptcy protection on April 13. On April 22, private equity firm Sycamore Partners said it wants out of a deal to acquire L Brands’ struggling Victoria’s Secret chain.

Even so, the parent company remained a retail force, with 2019 revenue of more than $16 billion and over 3,900 stores (across all brands) around the world. Earnings for last year were about $350 million — down from 2019, but still (marginally) profitable. In its mid-March earning call, executives focused on the combined portfolio’s ongoing potential, including its 60 million “known active customers,” and combined $4 billion in online revenue. And referring to the Gap brand, one executive said: “We continue to believe that the brand is better than the business.”

That mid-March earnings call left some analysts skeptical. Noting the possibility of “mall store closures” in response to the virus, Cowen Inc. analysts warned: “We are most cautious about Gap, as the brand did not do well in a great consumer environment, which is now getting worse.” And even Gap Inc.’s own executive vice president sounded ominous notes: Even before the pandemic’s full impact was clear, she noted that the firm needed to be “very objective in evaluating” the Gap brand, which had suffered from recurring “missteps” in marketing messaging and product assortment and “focus,” problems to be addressed with “a high degree of urgency” as the brand must “really earn its way in the portfolio.”

By early April, with lockdown restrictions in place across the country, the company had furloughed 80,000 workers — and the calculus around the Gap brand seemed starker. It was possible a “more profitable” business could ultimately come out the other side, Katrina O’Connell, Gap Inc’s new CFO, argued, but it would be a “smaller” one, shaped by an “aggressive” attitude toward “pruning” locations. “We have been closing stores at that brand,” O’Connell said, “but this crisis will absolutely set a new baseline for what component of the fleet we want to keep.”

The store closures that began in the second half of March — or “closeageddon,” as one Wall Street firm dubbed it — have already done visible damage to mainstream retail. True Religion, the once-red-hot denim brand, has filed for Chapter 11 bankruptcy protection on April 13. On April 22, private equity firm Sycamore Partners said it wants out of a deal to acquire L Brands’ struggling Victoria’s Secret chain. On April 20 Neiman Marcus was reported to be in bankruptcy talks, and reports on April 24 said the same of J.C. Penney.

More is expected, as retailers likely to declare bankruptcy will probably try to postpone doing so until the pandemic’s peak has passed and at least some stores have reopened. A company going through bankruptcy is better off with cash flow during that process, not to mention a less volatile marketplace. Department stores seem particularly vulnerable, but so are specialty retailers. J. Crew, working under the shadow of $1.7 billion in debt from a leveraged buyout, reportedly has a $4 million debt payment due at the end of April. RapidRatings, an analytics firm, rates the financial health of some 40,000 companies, on a 1 to 100 scale. According to an early April Wall Street Journal report, a recent RapidRatings “stress test” assuming another 15% revenue decline had Nordstrom’s rating fell from 78 to 34 — and The Gap’s dropping from 72 to 45. A score of 40 or lower indicates a greater risk of default in the 12 months ahead. For The Gap, that changed from a distant possibility to one it was just barely avoiding.

Meanwhile, a growing number of companies are simply skipping rent payments. These reportedly range from gym chain Equinox to Staples to the Cheesecake Factory to Dick’s Sporting Goods to Petco to Victoria’s Secret — and, as noted, Gap Inc. By one estimate, malls heavily reliant on “non-essential tenants” have only managed to collect 10 to 25% of April rent.

“It’s a complex spiral,” says Columbia’s Cohen, a more fast-moving version of a trend that’s been building for years: As mall tenants disappear, “there’s less reason to maintain the mall as a destination. And that weakens the existing players.”

“Would the failure of The Gap be a symptom of the failure of malls — or is the mall failing because of the failure of stores like The Gap? It’s difficult to say who’s the egg and who’s the chicken.”

The problems around the mall business are familiar, and have been mounting for decades. The category is overbuilt and due for a shakeout; top-tier, true destination malls that offer fancy amenities and feel like more of an experience are seen as better positioned. Aging, threadbare malls that have struggled for years and offer stale shopping choices have no obvious path forward — especially now.

And online retail has been slowly undermining weaker malls the same way malls gutted downtown retail in the mid-20th century, Cohen argues. Roughly 12% of retail transactions now take place online, and the number is closer to 25% for apparel, according to Lipsman, the eMarketer analyst. The virus-fueled shutdown only amplifies these trends: Top -tier malls are likely to make it through, Cohen continues, second-string malls are vulnerable, and the virus aftermath is just fast-forwarding the process of making or breaking them. The Gap, as a longtime mall stalwart, has many locations in older, less attractive malls.

“The Gap and other mall brands are tied to the tremendous, chronic weakness that hundreds of U.S. malls have exhibited,” he says. “So you have to ask, would the failure of The Gap be a symptom of the failure of malls — or is the mall failing because of the failure of stores like The Gap? It’s difficult to say who’s the egg and who’s the chicken.”

Opening up retail again, a process now tentatively underway in some parts of the country, is likely to be a gradual, experimental, and uncertain process. And a McKinsey & Company survey of U.S. consumers in the second week of April found 67% expecting to spend less than usual on apparel.

This brings up another major issue for The Gap and other apparel retailers: inventory. Sure, online sales are up a reported 30%, but even in-demand brands remain drastically overstocked. Many have reportedly slashed summer and fall purchase orders as a result. This isn’t just a matter of shelf space; it’s a matter of absent cash flow — necessary to bring back employees, and pay bills. Some demand is returning in Asia and parts of Europe, but as the head of one firm that connects brands with off-price merchants told Business of Fashion, it’s a buyer’s market: “There is so much inventory and it is from every brand under the sun.” Some observers figure it could take a few years for demand to return to pre-pandemic levels; there’s little choice but to offer drastic markdowns and swallow the losses.

And that’s what’s been happening. Impact Analytics, which tracks online pricing, recently found that many apparel items it surveyed in April were selling for prices similar to Black Friday sales. But these aren’t strategic loss-leaders, explains Impact spokesman Sulabh Jain: “The pressure is on the retailers to use their online channels to get rid of whatever they can.” By mid-April, the Gap brand was among those marking down basically everything by 60%.

What’s most scary for retailers is that demand is not simply being deferred but destroyed — the difference between postponing buying a new printer or dishwasher for a few months, and flat-out skipping the couple of new outfits you would have bought this year. The latter demand is never replaced, it’s just gone. And the usual options for rechanneling such inventory aren’t working: Venues like off-price chains (such as T.J. Maxx or Ross) are themselves closed and already have too much inventory to deal with. Even liquidators are oversupplied.

“What you have is a bunch of stuffed stores right now,” says Sucharita Kodali, a retail analyst at Forrester Research. Strapped for cash, many retailers have had to reduce or cancel purchase orders from factories — which could drive suppliers into bankruptcy, leading to more complications later in the year, she adds. “Are you just gonna sell whatever’s leftover from your stores now?” At least some retailers are already reportedly girding for holiday sales to come in 40% lower than previously expected.

The Gap is among those that have already reportedly canceled purchase orders with some regular factory suppliers. But most apparel retailers have little choice but to cut orders, and perhaps warehouse some merchandise and hope to sell it next year. Bottom line, one analyst predicted to The Wall Street Journal: “It will be a bloodbath.”

“It takes a long time to kill a retailer,” says Kodali, the Forrester analyst. And it’s true. Consider Sears, in decline since the 1990s, bought by KMart, during a bankruptcy, and still operating about 400 stores as of last year. Consider how many economic downturns, even severe ones, that a retailer like The Gap has endured. So maybe everything will work out. For instance there’s the theory — exemplified by Nike — that the U.S. consumer will rally, just as pent-up demand has resurfaced in China. Maybe retail will simply bounce back.

And in the U.S. surging unemployment will continue to dampen demand — which is probably why e-commerce sales have risen 30%, not 300%. “Lots of people who would be making purchases in the e-commerce space,” Elkind, the Amperity analyst points out, “are the same store associates who got laid off from the closure of hundreds of thousands of stores and restaurants.” (Before the virus, U.S. retail workers accounted for something like a tenth of the nation’s jobs.) From startup employees to factory workers, a huge amount of discretionary income from the demand side has vanished for now.

Even the spending that does happen will likely reflect a continued shift online, making more physical retail locations less profitable. “Consumers are now accustomed to staying home for weeks at a time and buying a wide range of products online,” McKinsey & Company argues. Even shoppers who never had much interest in online buying have been forced to experience it in the last six weeks, and may stick with it. “In the future, they won’t visit stores unless retailers give them good reason to.”

Imagine those assets coldly liquidated, stores emptied, signs removed. Maybe some enterprising start digital start-up acquires the brand identity, folding it into, say, an e-commerce app.

Finally, and most significantly, there’s the possibility of a “second wave” — the increasingly widespread expectation that while the pandemic will simmer down in the U.S. in the summer months, it will recur in the fall. A Morgan Stanley timeline posits a spike in new cases revving up in November and cresting through the holiday season. If this sparked a new wave of lockdowns and store closures, a fresh dose of stay-at-home fears, or both, it would hit apparel brands like Gap at a particularly vulnerable time.

The inevitable shakeout, probably already in progress by then, would become much more severe. Both real estate and inventory issues will cascade, as fragile consumer demand collapses all over again. Even survivors of the current cash crunch would have their liquidity severely tested, and many would fail.

Gap Inc. may have the resources to pull through — but it may decide that the Gap brand, its weakest link, can no longer weigh down the more promising parts of its business.

“We’ve got no pathway out of this, we don’t know when it’s going to be over,” Columbia Business School’s Cohen muses. “I would submit it’s going to be really messy, no Hollywood ending.” The likes of Costco, Walmart, and Targets are in a position to pull through. “But the Macy’s, the Dillards, the Belks, The Gap,” he says. “Anybody’s guess whether they get back on their feet.”

It seems hard to imagine — but it shouldn’t be. For all the talk of permanent change, it’s worth remembering that change is not a novelty in market-driven commerce. Grim as they may be, many of the changes we’re facing now have been in motion for a long time. Six months ago, Amperity’s Elkind says, “we were having a lot of depressing conversations with clients about closures.” Those conversations have only accelerated, but the tone has started to change. Increasingly, he says, clients are recognizing that the possibilities of a total reset may sound scary, but they are real: “It’s about starting with a blank slate.”

Imagine, then, that the combined blow of destroyed consumer demand, rent obligations, and inventory overhang so severe that Gap Inc. simply lacks the cash flow to meet its debt obligations. Seeking bankruptcy protection, it reorganizes with a further emphasis on its more bankable brands Old Navy and Athleta, and opts to sell off the rest — deciding the Gap brand can no longer “earn its way in the portfolio.”

The money-losing Gap division could struggle to find a buyer; it may be that the intellectual property around the brand is only attractive enough if it’s decoupled from the chain’s physical locations and by-then-dated inventory. Imagine those assets coldly liquidated, stores emptied, signs removed. Maybe some enterprising start digital startup acquires the brand identity, folding it into, say, an e-commerce app. But in whatever malls live on, there will be no more Gap to wander into. All that will remain is our nostalgia for what’s disappeared.

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