"To not be considering Amazon and others would bein my viewdelusional," Art Peck, CEO ofGapInc.,remarkedduringaconversationwithinvestors inMay2016.Facedwithincreasedcompetitionand achangingdemographic amid a shifting shoppinglandscape,PeckneededtoreverseGapInc.'scurrent trajectoryandconsideralternativestoimprovesales andmaintain itsnumber two overall ranking. 'But aftertwofullyearsintoPeck'sturnaroundstrategy. GapInc. continued todecline and showed noreal signsthatitwasagainresonatingwithconsumers.

ComplicatingPeck'sturnaroundstrategywasthe increase inshopping mall vacancies, aswell astheincreasedcompetition inretail.While higher-end malls continuedtoseeimprovements infoottrarric in2016,consumers decreased shopping at lower-endmalls,whereemptystorefrontswerebecomingcom- mon.Further,asshoppersbecamecomfortablewith onlineshopping,largerpercentages of retail sales were occurring through e-commerce. Yet, companiessuchastheIndetixGroup,knownforitsZarabrand, continually increased salesand expanded locations regardlessoftheseenvironmentalfactors.Peckpon- dered howGap could defend against unfavorable externalfactorsandcraftastrategywell-matchedto theretailenvironmentgoingintothelate-2010s.

CompanyHistoryandPerformance

Gap Inc.operated stores in70different countries in2016andwaspositionedascasualattire,withan

emphasisonbluejeansandkhakis.Offeringapparel forthewholefamily,brandsalsoincludedGapKids, babyGap, andGapMaternity. Banana Republic, incontrast, offered styles frombusiness casual tofor- mal,whereattirecouldbebothworkandeveryday. The Old Navy brand waspositioned tocompete atalower price pointin thecasual, everyday apparel category.

Thecompanywasfoundedin1969byDorisandDonFisher.ThecompanyfirstbegansellingLevi-branded jeans duetoDon's experience intryingtofind hisownpair that fit.Initially meant totargetayounger demographic,the name wasderivedfromthe phrase "generation gap."Gapstartedofferingitsown Gap-branded jeansin 1972.andwentpub-lic in1973. GapacquiredBanana Republicintheearly1980s,andlaunchedtheOldNavybrandinthe1990s.The companyacquired theAthletaathleticapparel brand andlaunched itsonlinefashionmar-ketplace Piperlime in 2008andacquiredboutiqueretail chain Intermix in 2013. ThecompanyclosedthePiperlimewebsiteandoneretaillocationin2013.

Gapbecameahouseholdnameinthe1990sthrough its clever advertising andmerchandising strategy thatmade it largely responsible formaking thejean+and- T-shirt style ubiquitous during that decade.Thecom-pany'sstrategyledtolargeandregularincreasesinnetsales,whichincreasedfrom$1.9billionk1990to

$11.6billionin1999.'Itsnetsalesbytheendofthedecadewerealmostdoublethe$6.6billionin1997.

Copyright O2017byJohnD. VarlaroandJohn E. Gamble. All rightsreserved.

	2016	2015	2014	2013	2012
OperatingResults($in millions)
Netsales	$15,516	$15,797	$16,435	$16,148	$15,651
Grossmargin	36.39	36.2%	38.39	39.0%	39.46
Operatingmargin	7.79	9.66	12.7R	13.39	12.4P
Netincome	$ 676	$ 920	$1,262	$1,280	$1,135
Cashdividendspaid	$ 367	$ 377	$ 383	$ 321	$ 240
PerShare Data(numberofsharesinmillions)
Basicearningspershare	$1.69	$2.24	$2.90	$.78	$2.35
Dilutedearningspershare	$1.69	$2.23	$2.87	$2.74	$2.33
Weighted-averagenumberofsharesbasic	399	411	435	461	482
Weighted-averagenumberofsharesdiluted	400	413	440	467	488
Cashdividendsdeclaredandpaidpershare	$0.92	$0.92	$0.88	$0.70	$0.50
BalanceSheetInformation($inmillions)Merchandiseinventory	$1,830	$1,873	$1,889	$1,928	$1,758
Totalassets	$7,610	$7,473	$7,690	$7,849	$ 7,470
Working capital	$1,862	$1,450	$2,083	$1,985	$1,788
Totallong-termdebt,lesscurrentmaturities	$1,248	$1,310	$1,332	$1,369	$1,246
Stockholders'equity	$2,904	$2,545	$ 983	$3,062	$2,894
Other Data($andsquarefootageinmillions)Cashusedforpurchasesofpropertyandequipment	$ 524	$ 726	$ 714	$ 670	$ 659
Acquisitionofbusiness,netofcashacquired	$ 4	$	$	$	$ 129
Percentageincrease(decrease)incomparablesales	(2)%	(4)R	6	2%	54
Numberofcompany-operatedstorelocationsopenatyear-end	3,200	3,275	3,280	3,164	3,095
Numberoffranchisestorelocationsopenatyear-end	459	446	429	375	312
Numberofstore locationsopenatyear-end	3,659	3,721	3,709	3,539	3,407
Squarefootageofcompany-operatedstorespaceatyear-end	36.7	37.9	38.1	37.2	36.9
Percentageincrease(decrease) insquarefootageof	(3.2)6	(0.5)%	2.4%	0.86	(0.8)%
company-operatedstorespaceatyear-end
Numberofemployeesatyear-end	135,000	141,000	141,000	137,000	136,000

Source:GapInc.201510-K.

Thecompany'ssalesgrowth declineddramaticallyinthe 2000sasitsmerchandise becamestale. Thedeclinein salesgrowthhadbecome adeclinein totalsalesby2015see Exhibit1.ArtPeck replaced GapCEOGlenMurphyinFebruary2015andwaschargedwithreversingthecompany'slong-runninglackluster performance andrecent salesdecline.PeckhadjoinedGapin2005andhadheldvariousexecutivepositionswiththecompany wherehespearheadedthecom-pany'sfranchisinginitiative,executeditsoutletstorestrategy,andleditsdigitalandecommercedivision.

Comparablestore sales declined3 percentfor the company between 2015 and 2016. The great- estdeclineswerewithBananaRepublic,whichhadexperienced7 percent and10percentdeclinesfor2015and2016, respectively.Comparable store salesforGap storesdeclinedby2percentandOldNavycomparablestore salesincreasedlpercentbetween2015and2016.Drivingthedeclineincomparablestoresaleswasthedeclineinthecompany'ssalespersquarefoot,whichhadfallen from $361in2014to

$337 in2015andto$334 in2016.

Thesales declineatGapwasreflectedin every majorbrandexceptOldNavy,whichexperienceda 2percentincreaseinsalesin 2016.Salespergeo-graphic regioneither declinedorwere unchangedfrom 2015to 2016exceptCanadaandAsia,which grewby3.5percentand 1.5percent,respectively.Whencomparedto2011,net salesacross brandshad onlyincreasedfrom$14.5billionto$15.5billioninsix years.Exhibit 2showsGapInc.sales bybrandandregionfor 2014through2016.

Amidthedeclineinstoreperformance,leadershipatGap Inc.continuedclosures ofunderperform-ing storesin2016toimprove operatingcosts.The

closuresaffected BananaRepublic, GapstoresinNorthAmericaandEurope,andOldNavystoresinAsiaseeExhibit3.Thecompany'sbalancesheetsfor2015and2016arepresentedinExhibit4.

OverviewoftheFamilyClothingStorelndusry

Withestimatedrevenuesover$101.9 billionin2016,competitorswithinthisindustrycarriedclothinglinesandapparelformen,women,andchildren.Annualgrowthfortheindustryaveraged1.8percentbetween

2011and2017andisexpectedtogrowby1.6percentannually between2016 and2021toreach$110.4 billion.Keydriversofindustrygrowthincludedpercapitadisposableincomeanddemographictrends.Typicallysalesofclothingtowomenmadeupthemajorityof industrysales. Also,agedemographicswithgainfulemploymentanddisposableincome werethelargestpurchasersofclothingintheUnitedStates.ThepercentageofrevenueaccountedforbydemographicgroupispresentedinExhibit5.

BfIck-and-MortarRetailersand'Ecommerce&les

Thefirstquarterof2017sawalmost$106billionine-commercesalesintheUnitedStates,ascomparedto$92 billioninthefirst quarterof2016.Whiletotalretail saleshadincreased 5percentfrom thefirstquarter of2016,total ecommerce sales in theUnitedStates hadincreasedby 15percentfor thesameperiDd in 2016andaccounted foralmost9percentoftota1U.S.retailsalesduringthequarter.

Theshifttowardincreasingconsumerconfidenceinonline shoppingwasevidentinthesaleofclothingandclothing accessories.Between2010and2015,e-commercesalesofclothingandaccessoriesexpe-rienced185percentgrowth,whilettaditionalbrick-and-mortarretailchannelsalesgrewby111percent.Exhibit6compares theU.S.annual salesofcloth-ingandclothingaccessoriesbybrick-and-mortarande-commercechannelsfor2011through2015offam-ilyclothing industrywithinClothing andClothingAccessories.