In The Headlines
Gap Struggles in a Fashion World that is “Anti-Normal”
Two years ago, Gap Inc. put such celebrities as Anjelica Huston and Elisabeth Moss in simple outfits—button-downs and blazers, jeans and airy, dull-hued blouses—and told shoppers to “Dress Normal” for its fall ad campaign. It backfired. Sales slumped over the next two months and stores were forced to discount heavily. The company’s chief marketing officer departed less than a year later. What Gap discovered was that people did not want to be normal. They want to stand out.
That is Gap’s problem. There is nothing wrong with selling basics. Plenty of shoppers need to keep their closets stocked with T-shirts, tank tops, and sweats for everyday wear. But much has changed since the mid-2000s, when Gap’s business was thriving. That was an age of uniforms. High schoolers flocked to Hollister’s seagull and college kids donned the Abercrombie & Fitch moose. Looming over it all was the Gap, which also clothed them—and everyone else for that matter. “They were the cheap, cool option,” Bridget Weishaar, an analyst at Morningstar, said of Gap’s basic clothes from that era. “They’ve just been displaced.”
The numbers are concerning. Comparative store sales fell 3% at Gap’s namesake brand last quarter, the company recently reported. The situation is even worse at its Banana Republic stores, which dipped 9%. Gap plans to close dozens more of its 3,700 stores in order to knock total square footage down 2% by the end of the fiscal year. Chief Executive Officer Art Peck said in a statement that he remains “unsatisfied” with the slow recovery, adding that his management team acknowledges the urgent need for progress.
Analysts wonder if Gap can afford to stay so large in a world where ubiquity of style is no longer relevant. The company operates almost 3,300 shops under its Gap, Old Navy, Banana Republic, Athleta, and Intermix brands. Simeon Siegel, an analyst at Nomura Securities, wrote in a note to clients that he is concerned that Gap’s businesses have overreached. The way he sees it, Gap is “simply too large in the new normal where physical distribution has become a liability and uniformity is no longer ‘cool.’”
While Gap has been working on initiatives to make its operating model more efficient and flexible, the pace of transformation appears to be slow and results are not yet visible. The company continues to lose customers, leading to the decline in comparable sales and falling revenues. With slow moving inventory, Gap is getting trapped into a vicious cycle where outdated designs lead to inventory accretion and subsequent write downs to clear unsold merchandise. Leading the cycle is the inability to bring fresh designs to its shelves. With e-commerce retail picking up, Gap’s physical stores are proving to be a liability for the company as sales decline, impacting operating leverage and consequently margins.
The new rulers of mass-market apparel are Spain’s Inditex, which owns Zara, and Sweden’s Hennes and Mauritz AB (more commonly known as H&M), which are using a new playbook to grow to unprecedented size. These fast-fashion companies take styles from catwalks to store shelves within weeks, creating a constantly shifting selection of clothes. Though their stores are even more pervasive than Gap’s, it is this sustained fluctuation that keeps things fresh. In the U.S., Gap’s home market, Forever 21, is using the same tactic.
When Gap peaked in 2005 with $16.2 billion in revenue, each of these companies was less than half its size. Now, as Zara and H&M flood the world with new stores, Gap is abandoning chunks of territory. In May, it announced the shutdown of about 75 locations. “There is a consumer for high quality, predictable, basics,” said Weishaar. “But the market has shrunk since when they’d built up that store base.”
Citations
1. http://bloom.bg/2bHFD93 – Bloomberg
2. http://bit.ly/2bQ5pJA – Forbes
Is Co-Working the Workplace Model of the Future?
Co-working has become ubiquitous over the last three years. The co-working market now has over 7,000 players around the globe. Co-working operators have emerged alongside the startup boom. While everyone has been reading and talking about fintech, virtual reality, and drones, this fast growing, new sub-sector of the real estate market has become one of the largest startup segments, hiding in plain sight.
The co-working business model has three main characteristics. Operators offer different businesses, rental offices, and desk spaces on a shared floor. The operator provides flexible terms allowing renters to move in and out and upgrade or downgrade with short notice periods. Perhaps the most important characteristic is that the operator designs community building programs and events to create a strong business network among its renters.
While it sounds simple, the model is an extremely difficult one to pull off successfully. According to several co-working operators in New York, Hong Kong, and Singapore, their businesses are not always profitable, as variable revenue streams remain unpredictable against a high fixed cost. This is especially true in Hong Kong, where commercial office space rent is the highest in the world. According to a Knight Frank study, at $255 per square foot, Hong Kong’s office space market is at least $100 more expensive than New York’s and almost three times pricier than Singapore’s. Co-working operators must pay these fixed prices for a substantial length of time, often five to ten years, when they sign floor leases. They must then turn around and generate the revenue streams to cover this rent while still offering flexible terms and attractive amenities and services.
To tackle the issue of constant flux and unpredictable revenues, co-working founders have creatively started to target niche communities such as writers, designers, or other groups. Some have even setup women only co-working spaces. The thinking goes that a stronger sense of community can create a sticky client base, and a tightly knit community which will want to stay together. On the opposite end of the spectrum, others have proactively diversified their renter base to hedge against a downturn in any one segment. Having a mixture of startups, small businesses, established corporations and sole proprietors could create a revenue mix that is not vulnerable across the board. This diversification strategy is especially critical in cities which regularly see transient expatriate populations, such as Hong Kong and Singapore.
Corporations are also beginning to adopt some co-working concepts into their own offices. According to a study published in January by Seattle-based property management firm Jones Lang La Salle (JLL), larger companies are rethinking and redesigning their workplaces into more open and evocative spaces. One of the drivers of this redesign has been the continually low employee engagement rates in Gallup’s surveys each year. While there is no direct link between engagement and office space layout, large companies are actively testing more open and creative new layouts for certain teams and functions.
A recent survey by Deskmag, a magazine that follows the co-working industry, confirmed that the industry is poised for further growth. Late in 2015, spaces reported an average of 76 members, almost 50% more than two years earlier. Now less than a year later, 62% of all co-working owners report wanting to expand their spaces. Loyalty among renters is also improving. Four out of five renters surveyed plan to stay where they are for the next year and two-thirds of members have not even considered leaving. The new data shows an increase in the number of renters who work at multiple spaces (15% of 2016 respondents vs. 9% of respondents in 2013).
As more operators enter the playing field, founders are experimenting with creative rental models and new service offerings. 2016 may be the year that co-working enters a second phase in its evolution. There are a number of emerging trends that will shape the future of co-working, including: membership services that allow clients to have space in multiple cities; concierge services with discounts on hotels and airline travel; corporate partnerships where companies can house entire teams or functions; and living quarters intermingled with working space.
Citations
1. http://bit.ly/2bzMs9g – Forbes
2. http://bit.ly/1PJEKG5 – Deskmag.com
The Good News Is . . .
• The number of Americans filing for unemployment benefits fell more than expected last week. Initial claims for state unemployment benefits dropped 4,000 to a seasonally adjusted 262,000 for the week ended Aug. 13, the Labor Department said. Claims have now been below 300,000, a threshold associated with a strong labor market, for 76 straight weeks. That is the longest such stretch since 1973, when the labor market was much smaller. The labor market is now viewed as either at or near full employment.
• Hormel Foods Corp., a leading food processor and marketer, reported earnings of $0.36 per share, an increase of 33.3% over year-earlier earnings of $0.27 per share. The firm’s earnings topped the consensus estimate of analysts by $0.01. The company reported revenues of $2.2 billion, an increase of 5.2%. Management attributed the results to strength in its Refrigerated Foods and Grocery Products business segments.
• Gawker Media, one of the most influential news organizations on the internet, was sold to Univision for $135 million. The sale came two months after Gawker filed for Chapter 11 bankruptcy, a concession to the financial pressure the company faces from a $140 million legal judgment in an invasion-of-privacy lawsuit by the former professional wrestler Hulk Hogan, whose real name is Terry G. Bollea. Univision, best known for its Spanish-language television network, has recently moved to aggressively expand its online portfolio, and adding Gawker’s sites fits with its plans to extend its reach beyond Spanish-speaking viewers. Univision bought a large stake in The Onion this year and acquired full control of Fusion, the news site and cable channel that it started with the Walt Disney Company in 2013. Univision also owns other digital media companies, including The Root, a site focused on African-American issues.
Citations
1. http://bit.ly/298eR69 – US Dept. of Labor
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/2bfc2mh – Hormel Foods Corp..
4. http://nyti.ms/2b9vvmK – NY Times Dealbook
Planning Tips
Tips for Tax Savings Your Investments
Although a lot depends on your personal situation, there are a few simple tax principles that apply to most investors that can help you save money. Below are some tips for managing your investments in a way that will help you save on taxes. Be sure to consult with your tax advisor to determine whether these strategies are appropriate for your situation.
Reinvest dividends – Reinvested dividends increase your investment in a mutual fund and thus reduce your taxable gain (or increase your capital loss). While the reduction in taxable income in this example may not always seem like a big difference in any given year, failing to take advantage of this rule could cost you significantly in the long run. By missing out on tax savings today, you lose the compounded growth potential those extra dollars would have earned well into the future, and if you fail to consider reinvested dividends year after year, your tax-adjusted returns will suffer considerably in the long term.
Report bond interest correctly – When you are calculating your taxes, remember to report the interest income from bonds on your tax return: you may not have to pay tax on all the interest you received. If you bought the bond in between interest payments (most bonds pay semiannual interest), you usually will not pay tax on interest accrued prior to your purchase. You must still report the entire amount of interest you received, but you will be able to subtract the accrued amount on a separate line. For the retail investor, municipal bonds, or munis, can offer significant tax advantages.
Purchase stocks through tax-deferred programs – Making your stock purchases through a tax-deferred account can save you a pile of money. Tax-deferred accounts come in many shapes and sizes. The most well-known are individual retirement account (IRA) and simplified employment pension (SEP) plans. The basic idea is that you are not taxed on the funds until you withdraw, at which point you are taxed at the rate of your income tax bracket. Waiting to cash in until after you retire will save you even more because your income will likely be lower when you are no longer working and earning a steady income. Also, while the benefits of tax-deferred accounts are substantial on their own, they provide an additional benefit of flexibility because investors need not be concerned with the usual tax implications when making trade decisions. Provided you keep your funds inside the tax-deferred account, you have the freedom to close out of positions early if they have experienced strong price appreciation, without regard to the higher tax rate applied to short-term capital gains.
Match your profits and losses in the same year – In many cases, it is a good idea to match the sale of a profitable investment with the sale of a losing one within the same year. Capital losses can be used against capital gains and short-term losses can be deducted from short-term gains. Also, if you have a particularly bad year, you can carry $3,000 of your loss over to future years. This may seem like a counterintuitive method, but it works very well in reality. The key is that capital gains (or losses) are only applied to your tax return when they are realized. So-called paper gains and losses do not count – since you have not actually sold your investments, there is no guarantee that your investments will not change in value before you close out your position. However, by actively choosing to close out (perhaps temporarily) of losing investments, you can successfully match your capital gains with offsetting losses, significantly reducing your tax burden.
Try to hold on to your stocks for at least 12 months – Short-term capital gains (less than one year) are always taxed at a higher rate than long-term ones. The difference between the tax rates of long-term and short-term capital gains can be 13% or more in some states and countries, and when you consider the long-term effects of compounding on reduced income taxes incurred today, it can prove very beneficial to hold onto your stocks for at least one year. Most investors plan to take part in the equity markets for decades, perhaps moving from stock to stock as the years pass, but still keeping their money actively working for them in the market for the duration of their capital accumulation period. If you fit this description, take a moment to consider the tax advantages of using a longer-term buy-and-hold strategy if you are not doing so already – the savings can be worth more than you think.
Citations
1. http://bit.ly/2bn5YHK – Forbes
2. http://bit.ly/2bIm00A – Motley Fool
3. http://bit.ly/2bIm00A – Investopedia
4. http://bit.ly/1KmKzW2 – MoneyCrashers.com
5. http://bit.ly/1EyCwZ2 – Bankrate.com
