Old Navy shows how addicted Americans are to cheap clothes

Nathaniel Meyerson

NEW YORK - When Old Navy burst onto the scene in 1994, it looked like it was going to change the world of retail. And he did.

In four years, Old Navy hit $1 billion in annual sales selling trendy, low-priced clothing for Americans of all ages. Old Navy reached kids and teens in a big way, just like their parents. Last year, Old Navy sales were around $8 billion.

The seller's strength shows just how addicted Americans have become to super cheap clothing. It is a chain that is emblematic of the staying power that type of merchandise has in retail, both in boom times and in bust.

"Customers want exceptional value," said Oliver Chen, an analyst at Cowen, adding that the country is gravitating toward retailers where "price is part of their DNA."

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Now, after 25 years, Old Navy has been so successful that it is parting ways with its parent company, Gap Inc., And while there are likely to be some bumps ahead for Old Navy, its future looks bright compared to the long-running gap drop.

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discount is king

Old Navy's sales at stores open at least a year grew 3% in 2018. And it's not the only discount retailer growing, even amid low unemployment and rising wages. Sales at stores open at least a year at TJX, the parent of TJMaxx, Marshalls and HomeGoods, were up 6% during the holidays compared to a year ago.

Department stores feel pressured by discount stores. Macy's, for example, is opening new Backstage discount stores within its larger locations.

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Meanwhile, sales at stores open at least a year at Nordstrom's full-price line fell 1.6% during the holidays, while its Rack clearance stores rose 4%.

"You can get great clothes that are not very expensive," Chen said of the industry.

Discount chains are also getting a boost from the middle gap in retail, which has left shoppers with fewer options to find quality products at affordable prices. Bon-Ton went bankrupt. Sears is hanging by a thread. And Payless is bankrupt.

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Get in and get out

The Gap, a premium brand known for its jeans, logo hoodies and turtlenecks, is also struggling, and those have often overshadowed Old Navy's achievements.

“We have found ourselves having to debate internally what is right for Old Navy versus what is right for one of the other brands,” CFO Teri List-Stoll told analysts on Thursday.

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Old Navy and Gap are moving in opposite directions and going after different customers, prompting Gap to finally free up its discount-focused subsidiary.

The split, which Gap hopes to complete in 2020, will allow Old Navy to open new stores in the United States and abroad to reach more shoppers looking for budget-friendly options, while also expanding online. The company's other brands, including Gap, Banana Republic, Athleta, Hill City, will try to consolidate their higher-income customer bases.

"A lot of this is about real estate and location," Susan Anderson, a senior analyst at B. Riley FBR, said of the split.

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Old Navy, as well as TJX, Ross, and Burlington, are mostly found in smaller malls. The Gap is linked to traditional malls, where traffic is slowing down.

At small malls, "it's easy to park, you walk in, you pick what you want and you walk out," Anderson said. "Consumers no longer want to walk through an entire mall."

Running Old Navy

While Old Navy has been the crown jewel of the Gap portfolio, the brand has had its share of problems.

The brand crashed in the late 2000s and suffered a period of declining sales during the recession and its aftermath. In 2012, Stefan Larsson took over as president of Old Navy. He reinvigorated the brand by focusing on families and introducing a fast fashion model that helped pioneer it after his long involvement with H&M.

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"Larsson is credited with infusing more fashion into the brand," though he continues to keep prices low, said Tiffany Hogan, a senior analyst at Kantar Consulting.

Sonia Syngal, who took over as CEO in 2016, will guide Old Navy into its next phase. She began her tenure at Gap more than a decade ago, after her stint at technology companies Sun Microsystems and Ford. Peck presented his "proven track record" to analysts on Thursday.

"I stopped and reflected on what I wanted to do at 35 years old," Syngal told her alma mater, Kettering University, in 2016 of her decision to go into retail. "I thought a lot about when I was a teenager, when I designed and made my own clothes," she added. "I wanted to get back into that creative environment."

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Syngal declined an interview for this story through a company spokesperson. But she has previously said that she wants the brand to appeal to a wide range of customers.

"It's all about inclusion, democracy and democracy style," she told ABC last year. Old Navy launched the Size YES campaign in 2018, bringing the brand's plus-size collection to 75 stores, previously only available online.

Uncertain future

Despite Syngal's success thus far, she still has a lot of work to do.

Although Old Navy sales in stores open at least a year increased compared to 2017, sales were flat during the holiday period.

"The fourth quarter was disappointing, particularly in stores," List-Stoll told analysts. She said Old Navy "missed opportunities," and she blamed the lackluster vacation period on the weather.

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Anderson, an analyst at B. Riley FBR, said "it was a bit telling that last quarter was slow" and questioned how much growth Old Navy will get from opening new stores while more people are shopping online.

Breaking up with Gap also means that Old Navy loses the advantages of operating under a huge parent company.

For example, Old Navy relies on Gap to help keep costs down and operations running. It runs joint loyalty programs with Gap, shares customer data, and even has a place on the Gap website.

"Old Navy has been running the business, but has benefited from the scale of the parent company," said Simeon Siegel, an analyst at Nomura Instinet. "This does not put them in a stronger position."