Should Gap Just Kill the Banana Republic Brand?

Markets Motley Fool

There's really no need for Gap (NYSE: GPS) to keep its Banana Republic brand alive. The upscale brand has been losing customers for years, and if it were to disappear, it probably wouldn't be noticed, let alone missed.

Continue Reading Below

Gap is already moving in that direction, completely shutting down its Banana Republic operations in the U.K., and with the large number of store closings scheduled for here at home, it wouldn't take all that much to finally cut the cord.

Whatever cachet Banana Republic once held has long since vanished, and with Gap's renewed focus on its Old Navy brand, now would be the perfect time to cut loose its anchor.

A slippery slope

In the past five years, the upscale clothing store has only had two quarters of same-store sales growth. It ended 2012 with $2.85 billion in global sales at 638 stores, a figure that fell to $2.47 billion last year but with 650 stores.

Through the first two quarters of 2017, Gap is down to 644 Banana Republic stores, but it announced last month that it intended to close some 200 underperforming Gap and Banana Republic stores, while opening 270 Old Navy and Athleta stores.

Continue Reading Below

As well it should. Old Navy is carrying the company. It generates more than twice the sales of Gap in the U.S. with only 25% more stores, which totaled more than 1,060 at the end of the second quarter. A smart business move would be to realign itself with what's working and shed everything that's not. That could entail changing the corporate name to Old Navy and getting rid of Banana Republic altogether.

Faded glory

While there are customers who do remain loyal to the upscale brand, it probably hasn't had the same panache that it did when former First Lady Michelle Obama was wearing snappy outfits from the chain. In fact, if Gap wanted to cater to the customers who do continue to shop there, it could take one of two other measures: It could reduce the clothing line to simply a brand and sell it in its other stores, perhaps even as a store-in-store boutique, or it could close down all the physical stores and make the brand an online-only store.

That wouldn't be unprecedented. Earlier this year, fashion retailer bebe closed all of its stores and converted itself into an e-commerce brand, while in January The Limited did the exact same thing. Last November, Kenneth Cole announced it was closing all but two stores and would move its business online, and Filene's Basement was revived by Macy's (NYSE: M) in 2015 as an online-only discount site. Converting Banana Republic to an e-commerce retailer would make a lot of sense.

An easy out

Keeping the stores open costs Gap a lot of money. In its annual report filed earlier this year, it said it has more than $1.1 billion in noncancelable lease obligations due this year, another $1.1 billion due next year, and some $6.5 billion total. Yet it notes most of its leases are for five-year periods, with varying dates of expiration. That would give Gap a means of easing the Banana Republic brand online, and could likely even convert many of them to Old Navy stores to help achieve its goals of opening more of the successful chain.

Whichever route Gap decides to take, it would be better than the current one it's on. There's no good reason to keep Banana Republic alive as all it's doing is diverting resources from Old Navy and Athleta, a small but growing chain. Now would be a good time for Gap to begin the process of killing off Banana Republic as we know it.

10 stocks we like better than Gap
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Gap wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of October 9, 2017

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.