COMPANY HISTORY AND PERFORMANCE Gap Inc. operated stores in 70 different countries in 2016 and was positioned as casual attire, with an emphasis on blue jeans and khakis. Offering apparel for the whole family, brands also included GapKids, baby Gap, and GapMaternity. Banana Republic, in contrast, offered styles from business casual to formal, where attire could be both work and everyday. The Old Navy brand was positioned to compete at a lower price point in the casual, everyday apparel category. The company was founded in 1969 by Doris and Don Fisher. The company first began selling Levi-branded jeans due to Don's experience in trying to find his own pair that fit. Initially meant to target a younger demographic, the name was derived from the phrase "generation gap." Gap started offering its own Gap-branded jeans in 1972, and went public in 1973. Gap acquired Banana Republic in the early 1980s, and launched the Old Navy brand in the 1990s. The company acquired the Athleta athletic apparel brand and launched its online fashion marketplace Piperlime in 2008 and acquired boutique retail chain Intermix in 2013. The company closed the Piperlime website and one retail location in 2015. Gap became a household name in the 1990s through its clever advertising and merchandising strategy that made it largely responsible for making the jeans-and-T-shirt style ubiquitous during that decade. The company's strategy led to large and regular increases in net sales, which increased from $1.9 billion in 1990 to $11.6 billion in 1999. Its net sales by the end of the decade were almost double the $6.6 billion in 1997. The company's sales growth declined dramatically in the 2000s as its merchandise became stale. The decline in sales growth had become a Page 299 decline in total sales by 2015sec Exhibit 1 . Art Peck replaced Gap CEO Glen Murphy in February 2015 and was charged with reversing the company's long-running lackluster performance and recent sales decline. Peck had joined Gap in 2005 and had held various executive positions with the company where he spearheaded the company's franchising initiative, executed its outlet store strategy, and led its digital and e- commerce division. EXHIBIT1 Financial and Operating Summary for Gap. Inc. Fiscal 2012- Fiscal 2016 (in millions except per share, store count, and employee data) 2016 2015 2014 2013 2012 Operating Results ($ in millions) Net sales $ 15,516 $ 16,435 $ 15,651 Gross margin 36.39 Operating margin $ 15,797 36.29 9.69 $ 920 $ 377 38.3% 12.79 1.262 383 7.7% 676 367 $ 16,148 39.0% 13.39 $ 1.280 $ 321 39.49 12.4% 1135 240 Net income $ $ $ $ $ $ Cash dividends paid Per Share Data (number of shares in millions) Basic earnings per share $1.69 $.78 $2.35 Diluted earnings per share $2.74 $2.33 Weighted average number of shares-basic $169 399 400 461 482 Weighted average number of shares-diluted 440 467 488 Cash dividends declared and paid per share $0.92 $0.88 $0.70 $0.50 Balance Sheet Information ($ in millions) Merchandise inventory $ 1889 Total assets Working capital $ 1.830 $ 7.610 $ 1.862 $ 1.248 $ 2.904 $ 1,873 $ 7.473 $ 1.450 $ 1310 $ 2.545 $ $ $ $ 7.690 2.083 1332 983 $ 1928 $ 7.849 $ 1,985 $ 1369 $ 3.062 $ 1758 $ 7,470 $ 1788 $ 1246 $2.894 Total long-term debt less current maturities Stockholders' equity Other Data ($ and square footage in millions) Cash used for purchases of property and equipment $ $ 524 4 (2)% $ $ 726 - (43% $ $ Acquisition of business, net of cash acquired 714 - -% 5 $ 670 - 2% $ $ 659 129 58 Percentage increase (decrease) in comparable sales Number of company-operated store locations open at year-end 3,200 3,275 3.280 3,164 3.095 Number of franchise store locations open at year-end 459 446 429 375 312 Number of store locations open at year-end 3,659 3,721 3,709 3.639 3.407 Square footage of company-operated store space at year-end 367 37.9 38.1 37.2 36.9 Percentage increase (decrease) in square footage of company-operated store space at year-end (3.2)95 (0.5) 2.4% 0.89 (0.8) Number of employees at year-end 135,000 141.000 141.000 137.000 136.000 Comparable store sales declined 3 percent for the company between 2015 and 2016. The greatest declines were with Banana Republic, which had experienced 7 percent and 10 percent declines for 2015 and 2016, respectively. Comparable store sales for Gap stores declined by 2 percent and Old Navy comparable store sales increased 1 percent between 2015 and 2016. Driving the decline in comparable store sales was the decline in the company's sales per square foot, which had fallen from $361 in 2014 to $337 in 2015 and to $334 in 2016. The sales decline at Gap was reflected in every major brand except Old Navy, which experienced a 2 percent increase in sales in 2016. Sales per geographic Page 300 region either declined or were unchanged from 2015 to 2016 except Canada and Asia, which grew by 3.5 percent and 1.5 percent, respectively. When compared to 2011, net sales across brands had only increased from $14.5 billion to $15.5 billion in six years. Exhibit 2 shows Gap Inc. sales by brand and region for 2014 through 2016. EXHIBIT 2 Gap Inc.'s Net Sales by Brand and Region, Fiscal 2014- Fiscal 2016 ($ In millions) Fiscal 2016 Gap Global Old Navy Global Banana Republic Global Other (2) Total Percentage of Net Sales U.S. (1) $3,113 $ 6,051 $ 2,052 $ 773 $ 11,989 Canada 368 490 223 1,084 Europe 630 689 Asia 1,215 220 109 1,544 Other regions 159 53 28 210 Total $5,455 $ 6,814 $ 15,516 100% $ 2,471 (7)% $776 9% Sales growth (decline) (5)% (2)% ($ In millions) Fiscal 2015 Gap Global Old Navy Global Banana Republic Global Porcentago of Not Sales Total Other (2) $ 712 U.S. (1) $ 3,303 $ 5,987 $ 2,211 $ 12,213 77% Canada 348 467 1,047 Europe 726 797 Asia 1,215 194 1,521 Other regions 159 27 219 Total $5,751 $ 6,675 $ 2,656 $ 715 $ 15,797 100% Sales growth (decline) (7)% 1% (9)% (2)% (4)% ($ In millions) Fiscal 2014 Gap Global Old Navy Global Banana Republic Global Total Porcentago of Not Sales Other (2) $ 725 U.S. (1) $ 3,575 $ 5,967 $ 12,672 $ 2,405 249 Canada 384 500 1,137 Europe 824 917 Asia 1,208 145 1,502 o Other regions 174 30 207 ' Total $ 6,165 $ 6,619 $ 729 $ 16,435 100% $ 2,922 2% Sales growth (decline) (3)% 8% 2% Amid the decline in store performance, leadership at Gap Inc. continued closures of underperforming stores in 2016 to improve operating costs. The closures affected Banana Republic, Gap stores in North America and Europe, and Old Navy stores in Asiasee Exhibit 3 . The company's balance sheets for 2015 and 2016 are presented in Exhibit 4 EXHIBIT 3 Gap Inc. Number of Store Locations, Openings, Closings, and Total Square Footage By Brand and Location, Fiscal 2015 Versus Fiscal 2016 January 30, 2016 Fiscal 2016 January 28, 2017 Number of Store Locations Number of Stores opened Number of Stores Closed Number of Store Locations Square Footage (In millions) Gap North America 866 844 Gap Asia 305 311 Gap Europe 175 164 Old Navy North America 1,030 1,043 Old Navy Asia Banana Republic North America Banana Republic Asia Banana Republic Europe Athleta North America Piperlime North America* Intermix North America Company-operated stores total 3,275 3,200 36.7 Franchise 446 456 NA Total 3,721 3,659 36.7 Increase (decrease) over prior year (1.77% (3.2% EXHIBIT 4 Gap Inc. Consolidated Balance Sheets, Fiscal 2015-Fiscal 2016 ($ and Shares in millions except par value) January 28, 2017 January 30, 2016 January 31, 2015 ASSETS Current assets: Cash and cash equivalents $ 1,783 $1,515 $1,370 1,873 Merchandise inventory 1,830 1,889 Other current assets 742 702 4,315 913 4,317 Total current assets 3,985 Property and equipment, net 2,616 2,850 2,773 Other long-term assets 679 638 600 Total assets $ 7.610 $ 7,473 $ 7,690 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of debt $ 65 $ 421 1,112 1,243 $ 21 1,173 Accounts payable Accrued expenses and other current liabilities 1,113 979 1,020 Income taxes payable 32 20 Total current liabilities 2,453 2,535 2,234 Long-term liabilities: Long-term debt 1,248 1,310 1,332 Lease incentives and other long-term liabilities 1,005 1,083 1,141 Total long-term liabilities 2,253 2,393 2,473 Commitments and contingencies Stockholders' equity: Common stock $0.05 par value 20 Authorized 2,300 shares for all periods presented: Issued and Outstanding 397 and 421 shares 20 2,440 Retained earnings 2,749 21 2,797 165 Accumulated other comprehensive income 54 85 2,904 2,545 2.983 Total stockholders' equity Total liabilities and stockholders' equity $ 7.610 $ 7,473 $ 7,690 OVERVIEW OF THE FAMILY CLOTHING STORE INDUSTRY With estimated revenues over $101.9 billion in 2016, competitors within this industry carried clothing lines and apparel for men, women, and children. Annual growth for the industry averaged 1.8 percent between 2011 and 2017 and is expected to grow by 1.6 percent annually between 2016 and 2021 to reach $110.4 billion. Key Page 301 drivers of industry growth included per capita disposable income and demographic trends. Typically sales of clothing to women made up the majority of industry sales. Also, age demographics with gainful employment and disposable income were the largest purchasers of clothing in the United States. The percentage of revenue accounted for by demographic group is presented in Exhibit 5 . EXHIBIT 5 Demographic Characteristics of Famlly Clothing Store Industry Customers, 2016 Porcentage of Total Revenue by Segment within Family and Clothing Stores Segmont Porcentago Women's 60.19 Men's 32.1% Children's 7.8% Percentage of Total Revonue by Generation within Family and Clothing Stores Market Porcentago 65 years and older 10.0% Baby Boomers 24.5% Generation X 35.5% Generation Y 22.5% Other 7.5% Source: www.ibisworld.com. Brick-and-Mortar Retailers and E-commerce Sales The first quarter of 2017 saw almost $106 billion in e-commerce sales in the United States, as compared to $92 billion in the first quarter of 2016.3 While total retail sales had increased 5 percent from the first quarter of 2016, total e-commerce sales in the United States had increased by 15 percent for the same period in 2016 and accounted for almost 9 percent of total U.S. retail sales during the quarter. The shift toward increasing consumer confidence in online shopping was evident in the sale of clothing and clothing accessories. Between 2010 and 2015, e-commerce sales of clothing and accessories experienced 185 percent growth, while traditional brick-and-mortar retail channel sales grew by 111 percent. Exhibit 6 compares the U.S. annual sales of clothing and clothing accessories by brick-and-mortar and e-commerce channels for 2011 through 2015 of family clothing industry within Clothing and Clothing Accessories. EXHIBIT 6 Clothing and Clothing Accessories Annual Sales by Channel, 2011 2015 Channel Brick & Mortar 2015 $255,831 52,128 2014 $250,775 46,833 2013 $246,313 40,262 2012 $239,493 33,579 2011 $228,438 28,309 E-commerce*** "Estimated values in millions of dollars **Clothing and clothing accessories, stores NAICS Code 448. itemized line "clothing and clothing accessories," under Total Electronic Shopping and Mal Order Houses NAICS Code 45411 Source: U.S. Census Bureau. The Hyperconnected Consumer and the Decline of Malls A retailer selling through both brick-and-mortar stores and online marketplaces, while utilizing social media and e-mail for communications with consumers, was referred to as omnichannel. Combining both Omnipresence (always there) and distribution channel, the practice considered that the consumer did not need to be physically present in a store to shop purchase, or even think about shopping. Through a communication channel, such as an e-mail, a shopper could be brought to an online storefront Page 302 Browsing and shopping, then, could occur at anytime, anywhere. The buying habits of the consumer had shifted since the growth of the Internet in the 1990s, as well as with smartphones in the mid-2000s. Most retailers were either online or brick and mortar. Further, in the early years of the online marketplace, there was often disbelief that a consumer would be willing to purchase a product online, either due to not seeing it or the sheer logistics of purchase and delivery. The tongue-in-cheek question of "Who would buy a 50-pound bag of dog food online?" might help illustrate this point. In other instances, experiments where a person would attempt to shop exclusively through online, and not visit any brick-and-mortar establishments, would make the newscast. However, as technology and logistics improved, so did the ubiquitous nature of technology and its role in a consumer's life. Logistics and delivery systems improved. Further, the introduction of smartphones made Internet browsingand shopping-easier. To this degree of adoption, demographics whose experiences with such technology had begun at earlier ages have now become a primary consumer. Thus, they did not experience as wide a divide between online and brick and mortar Page 303 as previous demographics. The word hyperconnected recognized then the consumer's relationship with a brand, and that the single act of purchasing had moved into this omnipresent, hyperconnected relationship through both online and brick and mortar. These trends had contributed to both the increase in online sales as well as the decline in malls. Global online retail sales increased in 2014 by 20 percent to $840 billion. This figure was attributable to the increased sales by online retailers, but also the increased presence of brick-and-mortar retailers online. Between 2000 and 2015, online purchases for some categories increased from 30 cents to 70 cents per dollar spent.6 Second, the mall as destination declined. As the percentage of online sales increased dramatically, foot traffic in shopping malls decreased. While the loss in foot traffic mostly impacted the lower-productive malls, storefronts are now empty, once occupied by brands like Nordstrom and JCPenney. Due to these shifts, retailers are closing the nonperforming anchor stores in lieu of their higher-performing locations. In 2016, Macy's announced over 30 store closings and the restructuring of over 4,000 jobs7 and Nordstrom announced its plan to restructure approximately 400 jobs. As these anchor store locations were closed, foot traffic continued to fall, trickling down into the non- anchor retailers. For example, American Apparel, Aeropostale, and Pac Sun had all filed for bankruptcy protection, while Bebe, The Limited, and Wet Seal had determined to close all locations." Page 304 The mall, as depicted in movies such as the 1990s movie Mall Rats, is no longer the place to hang out and be seen, either. Instead, the cultivation of an online presence through social media seems to help substitute. Thus, showing off a new outfit could be accomplished through photo-sharing apps and even video. A haul videowhere the purchases from a shopping excursion are uploadedcould be accomplished without the shopping mall. In addition, views and comments could be tracked and quantified in an online environment. Competition through Fast Fashion Clothing was traditionally designed, manufactured, and then shipped to the retailer for sale, much of it occurring prior to the beginning of the season. These designs could be from in-house designers, who used current trends, including fashion on display at fashion shows, to anticipate consumers' preferences. Retailers usually purchased inventory in bulk for the season to help improve costs. Buying an inventory of multiple designs for one season could also create a buffer when one style or design is not purchased, or is overpurchased, by the consumer. If a style did not sell in one location, it was usually internally transferred to another location. Or, eventually it was sold through a discount or staged-markdown sale. These markdowns occurred at the end of seasons, and helped facilitate space for incoming stock while minimizing losses associated with designs that did not sell well for a season. This traditional approach, however, was not only costly but also could lead to missing consumer demands. In addition, it assumed the consumer wished to purchase and maintain the clothing for a longer period of time. Fast fashion was the systematic shortening of the production-to-sales logistics within fashion retail. Fast fashion viewed clothing as a consumable and was moved faster through the retailer process. Pushing these sales was a shortened production-to-retail cycle, where internal designers observed customer preferences and made orders and changes mid-season. Thus, while most traditional retailers placed their large production orders before a season, fast- fashion retailers placed a majority of their orders mid-season, allowing flexibility and overall lower costs and losses due to unsold or markdown apparel. The faster-fashion cycle also pushed the consumer to visit retailers more, as they continually monitored new clothing, while treating clothes as a disposable commodity. PROFILES OF COMPETITORS Inditex Group No retailer seemed to epitomize the fast-fashion approach more than Inditex Group. The company was able to quickly launch fresh, new apparel lines to meet rapidly evolving consumer preferences through its vertically integrated design and manufacturing strategy. The company's designers closely monitored new fashion and style trends to create new lines as often as every month for its Zara brand stores and other retail brands. The company was able to get its new items in stores quickly by use of a tightly managed global logistics network that included 658 fabric manufacturers and 4.136 factories. The result was a stylish inventory of moderately priced apparel items that create a shopping frenzy in many of its stores across Europe and the rest of the world. In total, the company's supply chain was supported by 1,725 suppliers and 6,298 factories in 2015. Inditex Group operated over 7,013 locations in 88 countries and 29 online markets in 2016. Its brands included Zara, Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home, and Uterqe. In 2015, Inditex Group opened 330 new locations in 56 countries. In addition, Inditex Group started distributing its Zara brand through an official storefront on the largest online Chinese sales platform. Tmall.com . The popularity of its Zara concept with consumers was reflected in its financial performance. Zara stores totaled to only 2.002 of the company's 7,000+ stores, but the brand accounted for 65 percent and 67 percent of the company's revenues and earnings before interest and taxes (EBIT), respectively, in 2016. Exhibit 7 presents a financial summary for the Inditex Group for 2013 through 2016. EXHIBIT 7 Financial Summary for Inditex Group, 20132016 (In millions of dollars) Rovonu. Cost of merchandise 2016 $26,341 (11,336) 15,005 (9,239) (1,201) 2015 $23,617 (9,957) 13,661 (8,353) Gross Profit 2014 $20,472 (8,529) 11,942 (7,297) (1,023) 3,614 2,836 2013 $14,800 (6.019) 8,781 (5,307) (757) 2,702 Operating expenses, including other losses/income Amortization and Depreciation (1,155) 4,156 Profit from operations (EBIT) 4,543 Not Earnings (After Income taxes) 3,571 3,257 2,108 "Converted from curos with conversation rate of 1 cura = 113 U.S. dollars: rounded to nearest million dollar Sources: Inditex Group Annual Report, 2013, 2015. Abercrombie & Fitch Abercrombie & Fitch sells casual attire under its brands Abercrombie & Fitch, Hollister, and Gilly Hicks. Besides women's and men's clothing, it also sells children's clothing under its abercrombie kids brand. Abercrombie & Fitch was not a fast-fashion retailer and operated through a traditional logistics channel. It experienced a 13 percent decrease in net sales between 2011 and 2015, and another 5 percent decline in 2016. A casualty of the competitive climate and a failing strategy was its Page 305 Gilly Hicks branded stores, which were discontinued in 2014 and 2015. The company also closed 50 of its other branded stores in the United States in 2016see Exhibit 8. A summary of financial performance for 2013 through 2016 is presented in Exhibit 9 EXHIBIT 8 Abercromble & Fitch Global Locations by Brand, 2015-2017 Brand 2017 311 2015 361 Abercrombie U.S. Abercrombie International 44 2016 340 39 414 139 Hollister U.S. 433 398 145 Hollister International "Numbers represent figures at beginning of year. Source: Abercrombie & Fitch 2016 10-K. Abercrombie & Fitch sells casual attire under its brands Abercrombie & Fitch, Hollister, and Gilly Hicks. Besides women's and men's clothing, it also sells children's clothing under its abercrombie kids brand. Abercrombie & Fitch was not a fast-fashion retailer and operated through a traditional logistics channel. It experienced a 13 percent decrease in net sales between 2011 and 2015, and another 5 percent decline in 2016. A casualty of the competitive climate and a failing strategy was its Pace 305 Gilly Hicks branded stores, which were discontinued in 2014 and 2015. The company also closed 50 of its other branded stores in the United States in 2016see Exhibit . A summary of financial performance for 2013 through 2016 is presented in Exhibit 9 . EXHIBIT 8 Abercromble & Fitch Global Locations by Brand, 2015-2017 Brand 2017 2016 2015 Abercrombie U.S. 311 340 361 Abercrombie International Hollister U.S. 44 398 145 145 414 139 433 135 Hollister International "Numbers represent figures at beginning of year. Source: Abercrombie & Fitch 2016 10.K. EXHIBIT 9 Financial Summary for Abercrombie & Fitch Co., 20132016 (In millions of dollars) 2016 2015 2014 2013 Revenue Gross Profit Operating Income $3,327 2,029 15 $3,519 2,157 73 36 $3,744 2,314 114 52 $4,117 2,575 81 55 Net Income Sources Abercrombie & Fitch Co. 2016 10K In Search of a New Strategy for Gap Inc. Art Peck and Gap Inc. were faced with stark changes in the retail industry. As the consumer's desire to shop and congregate at the mall decreased, steep declines in foot traffic created ghost malls in some suburban areas, with empty storefronts and missing anchor stores. Yet contradicting this trend was the continual growth in industry retail sales, bolstered by online sales. These online retail sales were not just staggering, but the tremendous success of some online retailers were significant. Most notably, Amazon alone may have accounted for 60 percent of the growth in 2015 online sales 11 Exacerbating the dilemma for Gap Inc. was the fast-fashion strategies of Inditex Group and others that had succeeded in meeting the consumer's desire for fresh styles of clothing and were rapidly expanding in North America and other markets quicker than other competitors. Moving forward, Peck and Gap's other key managers needed to identify a strategy to reverse its recent sales decline. However, such a plan would likely fail without a viable approach to reaching the hyperconnected consumer seeking superior customer value. What are the strategically relevant components of the U.S. retail, family clothing stores industry macroenvironment? Select "yes" for those statements that are accurate and choose "no" for those that are not a. Market size and growth have been impacted; estimated revenues were over $100 billion, yet annual growth has been below 2 percent. (Click to select) b. Market share has been growing for this industry, especially foot traffic in brick-and-mortar stores. (Click to select) c. Segmentation in the family clothing industry has focused on women (60.1 percent) and younger consumers (35.5 percent) supporting the fast fashion-style of competition. (Click to select) d. Scope of rivalry is a growing concern for this industry as competitors compete in both brick-and- mortar and e-commerce platforms. (Click to select) e. There is growth in the number of competitor stores who are introducing new trends focused on women and young adults. (Click to select) f. A decline in popularity of malls has also led to a decline in foot traffic as consumers use technology for online shopping. (Click to select) COMPANY HISTORY AND PERFORMANCE Gap Inc. operated stores in 70 different countries in 2016 and was positioned as casual attire, with an emphasis on blue jeans and khakis. Offering apparel for the whole family, brands also included GapKids, baby Gap, and GapMaternity. Banana Republic, in contrast, offered styles from business casual to formal, where attire could be both work and everyday. The Old Navy brand was positioned to compete at a lower price point in the casual, everyday apparel category. The company was founded in 1969 by Doris and Don Fisher. The company first began selling Levi-branded jeans due to Don's experience in trying to find his own pair that fit. Initially meant to target a younger demographic, the name was derived from the phrase "generation gap." Gap started offering its own Gap-branded jeans in 1972, and went public in 1973. Gap acquired Banana Republic in the early 1980s, and launched the Old Navy brand in the 1990s. The company acquired the Athleta athletic apparel brand and launched its online fashion marketplace Piperlime in 2008 and acquired boutique retail chain Intermix in 2013. The company closed the Piperlime website and one retail location in 2015. Gap became a household name in the 1990s through its clever advertising and merchandising strategy that made it largely responsible for making the jeans-and-T-shirt style ubiquitous during that decade. The company's strategy led to large and regular increases in net sales, which increased from $1.9 billion in 1990 to $11.6 billion in 1999. Its net sales by the end of the decade were almost double the $6.6 billion in 1997. The company's sales growth declined dramatically in the 2000s as its merchandise became stale. The decline in sales growth had become a Page 299 decline in total sales by 2015sec Exhibit 1 . Art Peck replaced Gap CEO Glen Murphy in February 2015 and was charged with reversing the company's long-running lackluster performance and recent sales decline. Peck had joined Gap in 2005 and had held various executive positions with the company where he spearheaded the company's franchising initiative, executed its outlet store strategy, and led its digital and e- commerce division. EXHIBIT1 Financial and Operating Summary for Gap. Inc. Fiscal 2012- Fiscal 2016 (in millions except per share, store count, and employee data) 2016 2015 2014 2013 2012 Operating Results ($ in millions) Net sales $ 15,516 $ 16,435 $ 15,651 Gross margin 36.39 Operating margin $ 15,797 36.29 9.69 $ 920 $ 377 38.3% 12.79 1.262 383 7.7% 676 367 $ 16,148 39.0% 13.39 $ 1.280 $ 321 39.49 12.4% 1135 240 Net income $ $ $ $ $ $ Cash dividends paid Per Share Data (number of shares in millions) Basic earnings per share $1.69 $.78 $2.35 Diluted earnings per share $2.74 $2.33 Weighted average number of shares-basic $169 399 400 461 482 Weighted average number of shares-diluted 440 467 488 Cash dividends declared and paid per share $0.92 $0.88 $0.70 $0.50 Balance Sheet Information ($ in millions) Merchandise inventory $ 1889 Total assets Working capital $ 1.830 $ 7.610 $ 1.862 $ 1.248 $ 2.904 $ 1,873 $ 7.473 $ 1.450 $ 1310 $ 2.545 $ $ $ $ 7.690 2.083 1332 983 $ 1928 $ 7.849 $ 1,985 $ 1369 $ 3.062 $ 1758 $ 7,470 $ 1788 $ 1246 $2.894 Total long-term debt less current maturities Stockholders' equity Other Data ($ and square footage in millions) Cash used for purchases of property and equipment $ $ 524 4 (2)% $ $ 726 - (43% $ $ Acquisition of business, net of cash acquired 714 - -% 5 $ 670 - 2% $ $ 659 129 58 Percentage increase (decrease) in comparable sales Number of company-operated store locations open at year-end 3,200 3,275 3.280 3,164 3.095 Number of franchise store locations open at year-end 459 446 429 375 312 Number of store locations open at year-end 3,659 3,721 3,709 3.639 3.407 Square footage of company-operated store space at year-end 367 37.9 38.1 37.2 36.9 Percentage increase (decrease) in square footage of company-operated store space at year-end (3.2)95 (0.5) 2.4% 0.89 (0.8) Number of employees at year-end 135,000 141.000 141.000 137.000 136.000 Comparable store sales declined 3 percent for the company between 2015 and 2016. The greatest declines were with Banana Republic, which had experienced 7 percent and 10 percent declines for 2015 and 2016, respectively. Comparable store sales for Gap stores declined by 2 percent and Old Navy comparable store sales increased 1 percent between 2015 and 2016. Driving the decline in comparable store sales was the decline in the company's sales per square foot, which had fallen from $361 in 2014 to $337 in 2015 and to $334 in 2016. The sales decline at Gap was reflected in every major brand except Old Navy, which experienced a 2 percent increase in sales in 2016. Sales per geographic Page 300 region either declined or were unchanged from 2015 to 2016 except Canada and Asia, which grew by 3.5 percent and 1.5 percent, respectively. When compared to 2011, net sales across brands had only increased from $14.5 billion to $15.5 billion in six years. Exhibit 2 shows Gap Inc. sales by brand and region for 2014 through 2016. EXHIBIT 2 Gap Inc.'s Net Sales by Brand and Region, Fiscal 2014- Fiscal 2016 ($ In millions) Fiscal 2016 Gap Global Old Navy Global Banana Republic Global Other (2) Total Percentage of Net Sales U.S. (1) $3,113 $ 6,051 $ 2,052 $ 773 $ 11,989 Canada 368 490 223 1,084 Europe 630 689 Asia 1,215 220 109 1,544 Other regions 159 53 28 210 Total $5,455 $ 6,814 $ 15,516 100% $ 2,471 (7)% $776 9% Sales growth (decline) (5)% (2)% ($ In millions) Fiscal 2015 Gap Global Old Navy Global Banana Republic Global Porcentago of Not Sales Total Other (2) $ 712 U.S. (1) $ 3,303 $ 5,987 $ 2,211 $ 12,213 77% Canada 348 467 1,047 Europe 726 797 Asia 1,215 194 1,521 Other regions 159 27 219 Total $5,751 $ 6,675 $ 2,656 $ 715 $ 15,797 100% Sales growth (decline) (7)% 1% (9)% (2)% (4)% ($ In millions) Fiscal 2014 Gap Global Old Navy Global Banana Republic Global Total Porcentago of Not Sales Other (2) $ 725 U.S. (1) $ 3,575 $ 5,967 $ 12,672 $ 2,405 249 Canada 384 500 1,137 Europe 824 917 Asia 1,208 145 1,502 o Other regions 174 30 207 ' Total $ 6,165 $ 6,619 $ 729 $ 16,435 100% $ 2,922 2% Sales growth (decline) (3)% 8% 2% Amid the decline in store performance, leadership at Gap Inc. continued closures of underperforming stores in 2016 to improve operating costs. The closures affected Banana Republic, Gap stores in North America and Europe, and Old Navy stores in Asiasee Exhibit 3 . The company's balance sheets for 2015 and 2016 are presented in Exhibit 4 EXHIBIT 3 Gap Inc. Number of Store Locations, Openings, Closings, and Total Square Footage By Brand and Location, Fiscal 2015 Versus Fiscal 2016 January 30, 2016 Fiscal 2016 January 28, 2017 Number of Store Locations Number of Stores opened Number of Stores Closed Number of Store Locations Square Footage (In millions) Gap North America 866 844 Gap Asia 305 311 Gap Europe 175 164 Old Navy North America 1,030 1,043 Old Navy Asia Banana Republic North America Banana Republic Asia Banana Republic Europe Athleta North America Piperlime North America* Intermix North America Company-operated stores total 3,275 3,200 36.7 Franchise 446 456 NA Total 3,721 3,659 36.7 Increase (decrease) over prior year (1.77% (3.2% EXHIBIT 4 Gap Inc. Consolidated Balance Sheets, Fiscal 2015-Fiscal 2016 ($ and Shares in millions except par value) January 28, 2017 January 30, 2016 January 31, 2015 ASSETS Current assets: Cash and cash equivalents $ 1,783 $1,515 $1,370 1,873 Merchandise inventory 1,830 1,889 Other current assets 742 702 4,315 913 4,317 Total current assets 3,985 Property and equipment, net 2,616 2,850 2,773 Other long-term assets 679 638 600 Total assets $ 7.610 $ 7,473 $ 7,690 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of debt $ 65 $ 421 1,112 1,243 $ 21 1,173 Accounts payable Accrued expenses and other current liabilities 1,113 979 1,020 Income taxes payable 32 20 Total current liabilities 2,453 2,535 2,234 Long-term liabilities: Long-term debt 1,248 1,310 1,332 Lease incentives and other long-term liabilities 1,005 1,083 1,141 Total long-term liabilities 2,253 2,393 2,473 Commitments and contingencies Stockholders' equity: Common stock $0.05 par value 20 Authorized 2,300 shares for all periods presented: Issued and Outstanding 397 and 421 shares 20 2,440 Retained earnings 2,749 21 2,797 165 Accumulated other comprehensive income 54 85 2,904 2,545 2.983 Total stockholders' equity Total liabilities and stockholders' equity $ 7.610 $ 7,473 $ 7,690 OVERVIEW OF THE FAMILY CLOTHING STORE INDUSTRY With estimated revenues over $101.9 billion in 2016, competitors within this industry carried clothing lines and apparel for men, women, and children. Annual growth for the industry averaged 1.8 percent between 2011 and 2017 and is expected to grow by 1.6 percent annually between 2016 and 2021 to reach $110.4 billion. Key Page 301 drivers of industry growth included per capita disposable income and demographic trends. Typically sales of clothing to women made up the majority of industry sales. Also, age demographics with gainful employment and disposable income were the largest purchasers of clothing in the United States. The percentage of revenue accounted for by demographic group is presented in Exhibit 5 . EXHIBIT 5 Demographic Characteristics of Famlly Clothing Store Industry Customers, 2016 Porcentage of Total Revenue by Segment within Family and Clothing Stores Segmont Porcentago Women's 60.19 Men's 32.1% Children's 7.8% Percentage of Total Revonue by Generation within Family and Clothing Stores Market Porcentago 65 years and older 10.0% Baby Boomers 24.5% Generation X 35.5% Generation Y 22.5% Other 7.5% Source: www.ibisworld.com. Brick-and-Mortar Retailers and E-commerce Sales The first quarter of 2017 saw almost $106 billion in e-commerce sales in the United States, as compared to $92 billion in the first quarter of 2016.3 While total retail sales had increased 5 percent from the first quarter of 2016, total e-commerce sales in the United States had increased by 15 percent for the same period in 2016 and accounted for almost 9 percent of total U.S. retail sales during the quarter. The shift toward increasing consumer confidence in online shopping was evident in the sale of clothing and clothing accessories. Between 2010 and 2015, e-commerce sales of clothing and accessories experienced 185 percent growth, while traditional brick-and-mortar retail channel sales grew by 111 percent. Exhibit 6 compares the U.S. annual sales of clothing and clothing accessories by brick-and-mortar and e-commerce channels for 2011 through 2015 of family clothing industry within Clothing and Clothing Accessories. EXHIBIT 6 Clothing and Clothing Accessories Annual Sales by Channel, 2011 2015 Channel Brick & Mortar 2015 $255,831 52,128 2014 $250,775 46,833 2013 $246,313 40,262 2012 $239,493 33,579 2011 $228,438 28,309 E-commerce*** "Estimated values in millions of dollars **Clothing and clothing accessories, stores NAICS Code 448. itemized line "clothing and clothing accessories," under Total Electronic Shopping and Mal Order Houses NAICS Code 45411 Source: U.S. Census Bureau. The Hyperconnected Consumer and the Decline of Malls A retailer selling through both brick-and-mortar stores and online marketplaces, while utilizing social media and e-mail for communications with consumers, was referred to as omnichannel. Combining both Omnipresence (always there) and distribution channel, the practice considered that the consumer did not need to be physically present in a store to shop purchase, or even think about shopping. Through a communication channel, such as an e-mail, a shopper could be brought to an online storefront Page 302 Browsing and shopping, then, could occur at anytime, anywhere. The buying habits of the consumer had shifted since the growth of the Internet in the 1990s, as well as with smartphones in the mid-2000s. Most retailers were either online or brick and mortar. Further, in the early years of the online marketplace, there was often disbelief that a consumer would be willing to purchase a product online, either due to not seeing it or the sheer logistics of purchase and delivery. The tongue-in-cheek question of "Who would buy a 50-pound bag of dog food online?" might help illustrate this point. In other instances, experiments where a person would attempt to shop exclusively through online, and not visit any brick-and-mortar establishments, would make the newscast. However, as technology and logistics improved, so did the ubiquitous nature of technology and its role in a consumer's life. Logistics and delivery systems improved. Further, the introduction of smartphones made Internet browsingand shopping-easier. To this degree of adoption, demographics whose experiences with such technology had begun at earlier ages have now become a primary consumer. Thus, they did not experience as wide a divide between online and brick and mortar Page 303 as previous demographics. The word hyperconnected recognized then the consumer's relationship with a brand, and that the single act of purchasing had moved into this omnipresent, hyperconnected relationship through both online and brick and mortar. These trends had contributed to both the increase in online sales as well as the decline in malls. Global online retail sales increased in 2014 by 20 percent to $840 billion. This figure was attributable to the increased sales by online retailers, but also the increased presence of brick-and-mortar retailers online. Between 2000 and 2015, online purchases for some categories increased from 30 cents to 70 cents per dollar spent.6 Second, the mall as destination declined. As the percentage of online sales increased dramatically, foot traffic in shopping malls decreased. While the loss in foot traffic mostly impacted the lower-productive malls, storefronts are now empty, once occupied by brands like Nordstrom and JCPenney. Due to these shifts, retailers are closing the nonperforming anchor stores in lieu of their higher-performing locations. In 2016, Macy's announced over 30 store closings and the restructuring of over 4,000 jobs7 and Nordstrom announced its plan to restructure approximately 400 jobs. As these anchor store locations were closed, foot traffic continued to fall, trickling down into the non- anchor retailers. For example, American Apparel, Aeropostale, and Pac Sun had all filed for bankruptcy protection, while Bebe, The Limited, and Wet Seal had determined to close all locations." Page 304 The mall, as depicted in movies such as the 1990s movie Mall Rats, is no longer the place to hang out and be seen, either. Instead, the cultivation of an online presence through social media seems to help substitute. Thus, showing off a new outfit could be accomplished through photo-sharing apps and even video. A haul videowhere the purchases from a shopping excursion are uploadedcould be accomplished without the shopping mall. In addition, views and comments could be tracked and quantified in an online environment. Competition through Fast Fashion Clothing was traditionally designed, manufactured, and then shipped to the retailer for sale, much of it occurring prior to the beginning of the season. These designs could be from in-house designers, who used current trends, including fashion on display at fashion shows, to anticipate consumers' preferences. Retailers usually purchased inventory in bulk for the season to help improve costs. Buying an inventory of multiple designs for one season could also create a buffer when one style or design is not purchased, or is overpurchased, by the consumer. If a style did not sell in one location, it was usually internally transferred to another location. Or, eventually it was sold through a discount or staged-markdown sale. These markdowns occurred at the end of seasons, and helped facilitate space for incoming stock while minimizing losses associated with designs that did not sell well for a season. This traditional approach, however, was not only costly but also could lead to missing consumer demands. In addition, it assumed the consumer wished to purchase and maintain the clothing for a longer period of time. Fast fashion was the systematic shortening of the production-to-sales logistics within fashion retail. Fast fashion viewed clothing as a consumable and was moved faster through the retailer process. Pushing these sales was a shortened production-to-retail cycle, where internal designers observed customer preferences and made orders and changes mid-season. Thus, while most traditional retailers placed their large production orders before a season, fast- fashion retailers placed a majority of their orders mid-season, allowing flexibility and overall lower costs and losses due to unsold or markdown apparel. The faster-fashion cycle also pushed the consumer to visit retailers more, as they continually monitored new clothing, while treating clothes as a disposable commodity. PROFILES OF COMPETITORS Inditex Group No retailer seemed to epitomize the fast-fashion approach more than Inditex Group. The company was able to quickly launch fresh, new apparel lines to meet rapidly evolving consumer preferences through its vertically integrated design and manufacturing strategy. The company's designers closely monitored new fashion and style trends to create new lines as often as every month for its Zara brand stores and other retail brands. The company was able to get its new items in stores quickly by use of a tightly managed global logistics network that included 658 fabric manufacturers and 4.136 factories. The result was a stylish inventory of moderately priced apparel items that create a shopping frenzy in many of its stores across Europe and the rest of the world. In total, the company's supply chain was supported by 1,725 suppliers and 6,298 factories in 2015. Inditex Group operated over 7,013 locations in 88 countries and 29 online markets in 2016. Its brands included Zara, Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home, and Uterqe. In 2015, Inditex Group opened 330 new locations in 56 countries. In addition, Inditex Group started distributing its Zara brand through an official storefront on the largest online Chinese sales platform. Tmall.com . The popularity of its Zara concept with consumers was reflected in its financial performance. Zara stores totaled to only 2.002 of the company's 7,000+ stores, but the brand accounted for 65 percent and 67 percent of the company's revenues and earnings before interest and taxes (EBIT), respectively, in 2016. Exhibit 7 presents a financial summary for the Inditex Group for 2013 through 2016. EXHIBIT 7 Financial Summary for Inditex Group, 20132016 (In millions of dollars) Rovonu. Cost of merchandise 2016 $26,341 (11,336) 15,005 (9,239) (1,201) 2015 $23,617 (9,957) 13,661 (8,353) Gross Profit 2014 $20,472 (8,529) 11,942 (7,297) (1,023) 3,614 2,836 2013 $14,800 (6.019) 8,781 (5,307) (757) 2,702 Operating expenses, including other losses/income Amortization and Depreciation (1,155) 4,156 Profit from operations (EBIT) 4,543 Not Earnings (After Income taxes) 3,571 3,257 2,108 "Converted from curos with conversation rate of 1 cura = 113 U.S. dollars: rounded to nearest million dollar Sources: Inditex Group Annual Report, 2013, 2015. Abercrombie & Fitch Abercrombie & Fitch sells casual attire under its brands Abercrombie & Fitch, Hollister, and Gilly Hicks. Besides women's and men's clothing, it also sells children's clothing under its abercrombie kids brand. Abercrombie & Fitch was not a fast-fashion retailer and operated through a traditional logistics channel. It experienced a 13 percent decrease in net sales between 2011 and 2015, and another 5 percent decline in 2016. A casualty of the competitive climate and a failing strategy was its Page 305 Gilly Hicks branded stores, which were discontinued in 2014 and 2015. The company also closed 50 of its other branded stores in the United States in 2016see Exhibit 8. A summary of financial performance for 2013 through 2016 is presented in Exhibit 9 EXHIBIT 8 Abercromble & Fitch Global Locations by Brand, 2015-2017 Brand 2017 311 2015 361 Abercrombie U.S. Abercrombie International 44 2016 340 39 414 139 Hollister U.S. 433 398 145 Hollister International "Numbers represent figures at beginning of year. Source: Abercrombie & Fitch 2016 10-K. Abercrombie & Fitch sells casual attire under its brands Abercrombie & Fitch, Hollister, and Gilly Hicks. Besides women's and men's clothing, it also sells children's clothing under its abercrombie kids brand. Abercrombie & Fitch was not a fast-fashion retailer and operated through a traditional logistics channel. It experienced a 13 percent decrease in net sales between 2011 and 2015, and another 5 percent decline in 2016. A casualty of the competitive climate and a failing strategy was its Pace 305 Gilly Hicks branded stores, which were discontinued in 2014 and 2015. The company also closed 50 of its other branded stores in the United States in 2016see Exhibit . A summary of financial performance for 2013 through 2016 is presented in Exhibit 9 . EXHIBIT 8 Abercromble & Fitch Global Locations by Brand, 2015-2017 Brand 2017 2016 2015 Abercrombie U.S. 311 340 361 Abercrombie International Hollister U.S. 44 398 145 145 414 139 433 135 Hollister International "Numbers represent figures at beginning of year. Source: Abercrombie & Fitch 2016 10.K. EXHIBIT 9 Financial Summary for Abercrombie & Fitch Co., 20132016 (In millions of dollars) 2016 2015 2014 2013 Revenue Gross Profit Operating Income $3,327 2,029 15 $3,519 2,157 73 36 $3,744 2,314 114 52 $4,117 2,575 81 55 Net Income Sources Abercrombie & Fitch Co. 2016 10K In Search of a New Strategy for Gap Inc. Art Peck and Gap Inc. were faced with stark changes in the retail industry. As the consumer's desire to shop and congregate at the mall decreased, steep declines in foot traffic created ghost malls in some suburban areas, with empty storefronts and missing anchor stores. Yet contradicting this trend was the continual growth in industry retail sales, bolstered by online sales. These online retail sales were not just staggering, but the tremendous success of some online retailers were significant. Most notably, Amazon alone may have accounted for 60 percent of the growth in 2015 online sales 11 Exacerbating the dilemma for Gap Inc. was the fast-fashion strategies of Inditex Group and others that had succeeded in meeting the consumer's desire for fresh styles of clothing and were rapidly expanding in North America and other markets quicker than other competitors. Moving forward, Peck and Gap's other key managers needed to identify a strategy to reverse its recent sales decline. However, such a plan would likely fail without a viable approach to reaching the hyperconnected consumer seeking superior customer value. What are the strategically relevant components of the U.S. retail, family clothing stores industry macroenvironment? Select "yes" for those statements that are accurate and choose "no" for those that are not a. Market size and growth have been impacted; estimated revenues were over $100 billion, yet annual growth has been below 2 percent. (Click to select) b. Market share has been growing for this industry, especially foot traffic in brick-and-mortar stores. (Click to select) c. Segmentation in the family clothing industry has focused on women (60.1 percent) and younger consumers (35.5 percent) supporting the fast fashion-style of competition. (Click to select) d. Scope of rivalry is a growing concern for this industry as competitors compete in both brick-and- mortar and e-commerce platforms. (Click to select) e. There is growth in the number of competitor stores who are introducing new trends focused on women and young adults. (Click to select) f. A decline in popularity of malls has also led to a decline in foot traffic as consumers use technology for online shopping. (Click to select)