Gap to ‘mothball’ unsold inventory until next year

Discussion
Photo: Gap
Jun 08, 2020
Tom Ryan

Gap Inc. plans to pack and hold summer, transitional fall and fall merchandise that doesn’t sell due to store closures and potentially lower demand until the next year’s selling season.

Gap’s strategy is a response to inventory levels that have become significantly elevated with its stores temporarily closed in response to the pandemic.

Katrina O’Connell, CFO, said last Thursday on Gap’s first-quarter conference call, “While there is a cost to storing this product, the economics are more advantaged than flowing the goods into what is likely to be a highly promotional environment.”

She added, “We feel quite good that the pack-and-hold consists of either ongoing basics or summer product that was not ever delivered to stores that we can keep on hand.”

Two other methods Gap is using to balance inventories is writing down “now seasonally irrelevant” spring merchandise, with a portion donated to charities, as well as fulfilling online orders from in-store inventory.

Some analysts had reservations about the pack-and-hold strategy.

“We are cautious about whether this season’s products will resonate with consumers next year, given rapidly changing consumer preferences,” Oliver Chen, at Cowen, wrote in a note, according to CNN. “We also view there is a risk associated with the possibility of not having enough of on-trend items for the fourth quarter of 2020, which is the most important quarter for Gap.”

Packaway accounts for nearly half of total inventories for off-price retailers, but full-price sellers only typically make limited use of the tactic to take advantage of opportunistic buys.

Most major retailers so far appear to be focusing on markdowns and order cancellations and adjustments to balance inventories, although that may change with a slow recovery.

Among vendors, PVH, the parent of Tommy Hilfiger and Calvin Klein, is exploring pack-and-hold if promotions become “too aggressive” at the off-price channel in months ahead. He said many competitors are not as well-capitalized “to have the benefit of carrying goods to six or nine months to get to spring next year.”

DISCUSSION QUESTIONS: What are the pros and cons of a pack-and-hold strategy to manage inventory imbalances caused by the pandemic? What advice would you have about utilizing packaways to optimize inventories?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Of all apparel retailers, Gap should have the least to lose pursuing a pack-and-hold strategy."
"Gap can leverage pack-and-hold but more fashion forward brands will be challenged to do the same."
"If the economics of storing inventory outweigh the loss from markdown, then this is good business sense."

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24 Comments on "Gap to ‘mothball’ unsold inventory until next year"


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David Naumann
BrainTrust

Excess out-of-season inventory is a huge problem for apparel retailers. Mothballing seasonal merchandise for a year can be risky, as styles may change and it ties up working capital. The decision to mothball or not is based on predicting the best case situation based on inventory carrying costs, opportunity costs, and expected selling prices today vs. next season. Another option that we recently discussed on RetailWire is donating to a charitable organization and recouping some of the cost through tax benefits.

Donating excess seasonal inventory to a non-profit may be the smartest choice from the perspective of both financial and social responsibility.

Georganne Bender
BrainTrust

Good point! Gap’s Old Navy donated $30 million worth of clothing to struggling families during the COVID-19 pandemic.

David Naumann
BrainTrust

It is interesting that Old Navy and Gap have taken different approaches.

Gene Detroyer
BrainTrust

I agree completely with the analysis part of the decision, especially for a retailer like Gap which sells very basic products. But you got me thinking about the donation idea.

The question is all about the deduction. What is the chance of the deduction for giving the product away has a more positive effect on the bottom line than selling the inventory off at less than what it was purchased for? I’d say the chance is pretty good.

Carol Spieckerman
BrainTrust

The apparel business was bordering on trend-less before coronavirus hit and is in full-blown basics mode now that it has. Of all apparel retailers, Gap should have the least to lose pursuing a pack-and-hold strategy. Mothballing inventory isn’t too risky, so long as it’s not taken literally.

Suresh Chaganti
BrainTrust

This is certainly a financial decision and not based on brand dilution concerns that drive similar decisions for luxury fashion brands. To that extent, it should have been an easier decision. Overall I get a feeling Gap will come out ahead on this.

Bob Phibbs
BrainTrust

Inventory, like milk, doesn’t get better with age – in fact, it stinks. A brand hopelessly out of touch gains nothing from holding on to the past.

Bethany Allee
BrainTrust

Pack-and-hold is smart if you have the resources to shelve and if the goods will remain relevant, which is why it works for Gap.

This strategy signifies part of the long-term trickle down economic impact we will see from COVID-19. Designers and manufacturers may have escaped some of the initial impact of the pandemic, only to be hit financially later.

Dick Seesel
BrainTrust

If Gap plans to pack and hold basic denim, tees and other “commodity” products, they can get away with it. On the other hand, boxing up trend merchandise that may well look dated next spring is a questionable decision.

In the background of this decision is reporting about Gap being sued for backpayment of rent. If the company is having these kinds of cash flow issues, isn’t the best solution to turn inventory into cash?

David Leibowitz
BrainTrust

If the economics of storing inventory outweigh the loss from markdown, then this is good business sense.

Retailers just need to be careful that the holdbacks are still seasonally relevant next year. They don’t want to be holding the equivalent of yesteryear’s bellbottom pants. Well, unless you plan on holding a vintage sale.

Oliver Guy
BrainTrust

Seems to make a lot of sense overall – assuming they do not lose track of what they actually have. They are not alone in doing this. Irrespective it is going to have a margin impact – although any stock they need to pull back from stores is going to have a bigger impact. Suppliers are going to suffer as a result of consumer demand drops – but it is difficult to see what else can be done. Meanwhile there are some interesting approaches to “re-using” inventory from such retailers – loststock.com is one great example – a “lucky dip” of items based on your preferences.

Rich Kizer
BrainTrust

Look, there is something called inventory turn, and holding a bunch of merchandise packed away in your “hope boxes” won’t help turn. And all that old stuff? It holds dollars hostage. OK so we get this: merchandise value depreciates, markdowns attack margin and those dollars that could be used for those three time turn buy opportunities are stuffed in the boxes down in the basement, waiting for sidewalk sales. Good turn strategy? Really? Not my favorite.

Ken Morris
BrainTrust

Gap can leverage pack-and-hold but more fashion forward brands will be challenged to do the same. I would use the pack-and-hold as a way to optimize inventory. It gives a retailer the option of reallocating merchandise based upon more up-to-date metrics. This pandemic can have a major effect on the attributes of allocation and having more current data will improve the eventual sell through.

Neil Saunders
BrainTrust

Given that so much of its product is “basic” and does not change much from year to year, this policy makes more sense for Gap than it might for other retailers. However, let’s be clear why Gap has done this: it’s to prevent taking huge write-downs on existing stock which would impact the bottom line. It’s an act of desperation from a retailer that, even under normal circumstances, can’t shift product without resorting to huge discounts.

This has nothing to do with sustainability or protecting suppliers (which I have seen mentioned elsewhere). Indeed, Gap’s decision actually harms suppliers. They’ve already canceled orders from suppliers in Bangladesh and have demanded discounts for lines already in production. That has a very negative impact on people in the region.

Jeff Sward
BrainTrust

This makes perfect sense for the Gap division. They are at almost zero risk of having their first two tiers of product, basics and key items, fall out of favor by next year. There would not have been that much change in the aesthetics and attitude of the product under normal circumstances. It’s the top two tiers of fashion and risk that are the problem. As in — not enough novelty, personality and fun. Gap needs to clear out old-thinking product and make room for a new merchandising point of view a year from now. The logistics of pack and hold are doable. It’s the new merchandising and design that’s the hard part.

Georganne Bender
BrainTrust

I am not a fan of packing away product to hold for sale until next year. That being said, Gap sells a lot of basic goods like t-shirts, tanks and denim; merchandise that if stored properly has a longer shelf life. If this strategy works for off-price retailers it should work for Gap.

It’s easy to be an armchair quarterback and think we know better than the team actually running the company. There is obviously a reason for this move, let’s see how it plays out.

Peter Charness
BrainTrust

Of course it depends what the product is — but it’s largely a financial punt of write-offs into next year. Which is odd. Most companies prefer to get the bad news out as soon as possible and put it behind them.

Ralph Jacobson
BrainTrust

With the opening of many stores across the country, I’d recommend doing the math to see if immediate discounts and redistribution to other stores to flush the inventory might be more profitable than the carrying costs and fiscal liabilities of holding inventory until next year.

Cynthia Holcomb
BrainTrust

Gap sells basics mixed with one-off items designed not to sell. Seriously. Fear of fashion and being afraid of product design mistakes leaves Gap with basics to sell — evergreen inventory which should be on the floor and sold online now. Storing products in original packing materials for months fools no one. Products trapped in original product packaging develop an odor over time as the gases of dyes, fibers, etc. are trapped inside the packaging. Come spring, Gap stores will smell like discount stores.

Come on Gap, everyone needs new basics to replace the tired basics we have worn to countless homebound Zoom meetings.

Ananda Chakravarty
BrainTrust

This is a simple financial move. Inventory holding costs are less than expected markdowns and limited demand. Expectations are that demand will pick up next year and the product will retain selling value at or close to full sales price in the coming year. It’s likely there is excess storage/warehousing space already established that makes this worth it. Good move, but only if gains are realized a year down the road. The Gap is not in an ideal financial spot right now, especially as it hasn’t been paying rent and is caught up in a lawsuit from Simon, so this move also serves to boost up corporate assets — at least on paper.

Almost like taking a sabbatical from operations, but overhead costs still accrue.

Ricardo Belmar
BrainTrust

Let’s be honest. Gap hasn’t been known for desirable, trendy clothes for some time and is generally looked at for basics that last longer in someone’s closet than most fast fashion clothing. Compared to other brands, Gap could hold that inventory and it likely will have the same appeal to their core customer. I expect they looked at this from a financial perspective and compared the cost of holding inventory vs heavy discounting to sell it now. No doubt they have calculated the margin is better with the hold approach. It would be interesting to know if they evaluated a donations approach (similar to what Old Navy is doing, another of their brands) as was discussed in a previous RetailWire discussion.

Craig Sundstrom
Guest

For those who deal with fashion or technology items, options may be limited (particularly for technology, where obsolescence quickly renders older items unsalable); ideally taste mavens will endorse a “revival” of this past spring (that wasn’t) for next year, but who really knows what will happen.

For more prosaic merchandise, why not? A pair of jeans or khakis doesn’t change much.

Kenneth Leung
BrainTrust

Would like to see what categories those are. If we are talking merch like jeans and basics, as long as they are stored in a low humidity environment, you can keep them till next season or at least half a season. Would be interesting to see the data behind their decision; hopefully it is data driven and not just kicking the problem down the year, but not realizing the loss now.

Kai Clarke
BrainTrust

Pack and hold is a massive problem for all apparel retailers and the COVID-19 pandemic only makes it worse. The biggest issue with this approach that Gap is considering is how it impacts their COGS and its position on the future bottom line. Add to this the cash flow that Gap is losing out on, and you have the cost to hold and maintain an aging inventory, the lack of cash that it ties up, and the impact that an aging inventory has on the bottom line both now and in the future. Gap should sell this inventory, capture the cash flow it represents, and prepare for next season.

wpDiscuz
Braintrust
"Of all apparel retailers, Gap should have the least to lose pursuing a pack-and-hold strategy."
"Gap can leverage pack-and-hold but more fashion forward brands will be challenged to do the same."
"If the economics of storing inventory outweigh the loss from markdown, then this is good business sense."

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