Gap's Revival | Faded Khakis | 1

0:09It's September 2022 on Wall Street. Live from the trading room floor of the New York Stock Exchange Exchange. CNBC welcomes a very different kind of guest, Kanye West, or Ye as he now goes by. He joins by satellite, and what follows is one of the strangest outbursts CNBC has ever aired. Ye appears on screen inside what looks like a shipping container, bare metal walls, no windows. He's wearing a bulky white sweatshirt and a ragged gray baseball hat. He stares at the ground, rarely glancing at the camera. Not that it matters. His eyes are hidden behind a pair of oversized, mirrored wraparound sunglasses.

0:52Ye designed the shades himself and planned to sell them in Gap stores. That's Gap Incorporated, the San Francisco retailer famous for laid-back basics. Gap was a mall staple during the 1970s, 80s, and 90s before stumbling in the 2000s. By 2020, the company was in trouble. Gap's sales were sinking. Things got so bad, the company even considered spinning off its Old Navy brand, splitting into two companies just to stay afloat. Then a new CEO arrived and brought Ye aboard to help her right the ship. Gap signed a deal with Ye to launch a new brand, Yeezy Gap. For Gap, it wasn't just a partnership.

1:36It was a lifeline. But now, Ye is torpedoing his Gap deal just two years into it. Ye tells CNBC viewers that Yeezy Gap's prices are too high. He accuses the company of copying some of his designs in their other merchandise. And he says Gap's leadership has ignored his concerns. Sometimes I would talk to the guys, the heads up, the leaders, and it would just be like I was on mute or something. And they totally, our agenda, it wasn't aligned. For months, there have been hints that Ye and Gap weren't seeing eye to eye. Products were slow to roll out, and Ye publicly criticized the company's board.

2:19But how did things get this bad? Ye says it's because he hasn't been given the creative control he was promised. And everyone knows that, you know, I'm the leader, I'm the king, right? So a king can't live in someone else's castle. A king has to make his own castle. Ye announces he's terminating his deal with Gap, calling this moment the Day of Liberation. The interview spirals from there. Ye talks about the homes of billionaire friends, his personal politics, the chance he might move his money from one bank to another. Finally, he gets back on topic. He says there's only one person who can help the Gap brand regain its cool, Ye himself.

3:05But renegotiating his deal with Gap is not an option. The king has spoken. Well, don't bring a leader in and have them not lead. You know, why would I argue with people who are getting paid by the Gap? I'm sorry, you know, I'm not going to argue with people that are broker than me about money. For Gap, this isn't just another bad day. It's a public breakup, broadcast in real time to Wall Street and the world. Now let's pause for just a moment here. Anyone else remember when all this went down in real time? When brands bring in celebrities, it's usually for borrowed cool and instant injection of cultural relevance.

3:48But here's the problem. Celebrity timelines and agendas often run on emotion, not earnings calls. If the brand wants consistency and the star wants freedom, things can unravel fast. Partnerships work best when both sides want the same future and agree on who's in charge. Otherwise, you're not hiring a savior. You're renting drama. And in the case of Gap, you get a hard and very public lesson in where you really stand in the hierarchy of pop culture. Ouch. In Ye's mirrored sunglasses, Gap is forced to see itself. A fading legacy retailer losing cultural relevance while being both outpriced and outpaced by cheaper fast fashion rivals.

4:34Now, Gap faces a choice. Should it attempt to revive the quality and style that once made it iconic? Or should it leave its old khakis in the closet and try on something brand new?

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7:04From Wondery, I'm David Brown, and this is Business Wars.

7:34Be honest. When was the last time you fell into the Gap? For a lot of us, it's been a while. Gap's logo sweatshirts, khakis, and denim once defined casual American style. The Gap ruled them all, and it conquered Wall Street, too. But these days, the Gap just doesn't dominate our closets the way it used to. Increased competition has something to do with this. Starting in the new millennium, fast fashion brands like Zara and H &M figured out how to undercut Gap on price, style, and speed. As they did, Gap became weighed down by all its brick and mortar. It went from an iconic brand to one that was symbolic of America's retail decline.

8:19Remember when Gap was cool? When celebrities like Spike Lee and Madonna graced their print ads? Or when khaki-clad kids jumped, jived, and wailed in TV spots? Well, the Gap has been chasing that magic ever since. And failing. Despite some success with price-competitive Old Navy, the Gap brand went stagnant throughout the 2010s and into the 2020s. By 2025, the company wasn't making much more than it did back in 2010. Gap has tried to fix this, including hatching a plan to spin off Old Navy, its most successful division. That didn't work, nor did the plans of a succession of CEOs, five different leaders since 2000.

9:02But now, Gap has a new boss and a new plan, and the confidence that this time it'll get its groove back. In our new series, we'll tell the story of how an American icon fell out of fashion and of the stylish new leaders who think they can raise it back up. The big question? Can Gap Inc. truly reinvent itself as a culturally relevant and profitable fashion house, one that unites distinct American brands under one umbrella? Or will it fall back into the gap, riding its own nostalgia all the way into irrelevance? This is Episode 1, Faded Khakis.

9:51It's August 2016 in Fishkill, New York. Once a defining brand of American fashion, The gap has been limping along for most of the 2000s. Its stock is slumping, its stores are underperforming, and its clothes aren't exactly flying off the racks. So when a fire erupts just after 10 p.m. inside a massive gap distribution center 60 miles north of Manhattan, it's not just a setback. It's a massive disaster. Workers at the 24-hour facility rush outside as flames flicker on the building's roof and smoke billows. Firefighters quickly arrive. They scramble up ladders and spray water onto the roof. But it's of little use.

10:36The blaze only grows larger as flames feed on tens of thousands of cardboard boxes and garments. At home, the facility's manager, a 30-year Gap veteran, gets the call he's long dreaded. An employee breathlessly tells him that a fire is consuming the distribution center. The fire rages for more than six hours. Just before dawn, it's mostly extinguished. And by then, the extent of the damage is clear. A news reporter goes live from the scene. Flames rose through the sky, visible for miles overnight. The building burning is the enormous Gap Incorporated campus in Fishkill, which houses a warehouse and distribution center for the clothing company.

11:20The nearly 2.5 million square foot facility was renovated and expanded in 2014 and has been badly damaged, if not destroyed, overnight. Later that morning, Gap, Inc. CEO Art Peck gets a call at the company's San Francisco headquarters. Gap's biggest distribution facility is gone. Peck sets the phone down and puts his head in his hands. He's relieved to hear that no one was hurt, but getting close to the East Coast will be a huge challenge. And the timing couldn't be worse. Gap needed this fire about as much as it needed a hole in the head. After dominating the 90s, Gap has been struggling for most of the 2000s.

12:06Not only has it lost some of its brand luster, its stock now trades$4 below the price it opened at in Y2K. Peck was tasked with fixing this when he was promoted to CEO in February 2015. But sales haven't improved under his leadership. In fact, they've gotten worse. Just months into his tenure, Peck promised investors that a no-excuses spring was coming in 2015. But that spring came and went, and sales at the Gap, Old Navy, Athleta, and Banana Republic dropped a combined 6%, over already bad numbers from 2015. Inventory piled up into the summer, and these piles have been a big problem for Gap. Unlike fast fashion chains like H &M, Zara, and Uniqlo, the Gap has struggled to adapt to changes in customer tastes.

13:02The other companies are built for speed and are better equipped at swapping out inventory. Gap can't keep pace. One example, at Gap, all new merchandise orders require approval from headquarters. At Zara, individual store managers can authorize new stock whenever they need it. And when stock is ordered, Zara's factories around the world are set up to produce clothes in small quantities. This way, inventory doesn't pile up if items don't sell. Zara even embeds radio frequency identification, or RFID, chips to help manage their inventory. The chips store information and electronically alert managers about which items are and aren't selling.

13:45They also prompt reorders when stock gets low. Gap has experimented with the same technology, but its experiments aren't at the same scale as Zara. You see, Zara moves like a tech company that happens to make clothes. Small runs, constant feedback loops, rapid restocks. It's fast, messy, iterative. And it works. Legacy brands like Gap want tidy seasons and massive volumes. But in a world where TikTok can kill a trend in six days, neatness is a liability. Agility beats precision every time. And Gap doesn't own its own factories, either. It outsources clothing production and makes mass orders months in advance.

14:32These big orders have led to big problems. To name one, the company ends up stuck with pallets full of women's blazers whose armholes were cut too small for the average woman. Little wonder, then, that by October, Gap's store sales fall another 10%. But amidst this slide, one stock analyst sees a silver lining. He calls the summer fire a fortuitous reduction in inventory and implies it might help with Gap's unappealing merchandise assortments. Now let that one sink in for a second. A devastating fire is good news? Yeah, that's how bad things have gotten at the Gap. In time, Peck will hatch a plan to help Gap rise from the ashes.

15:21But after two more years of no-excuses springs that fail to deliver, he might be the one about to get burned.

15:35It's February 2019 in San Francisco. Art Peck, the 64-year-old CEO of Gap, Inc., steps into the company's waterfront headquarters. Outside, the Bay Bridge glints in the morning sun. The 15-story headquarters may be made of glass and steel, but it was built on khaki and denim, the clothes that once made Gap a symbol of American casual style. Today, though, that iconic legacy seems lost. Peck makes his way to a conference room. At the door, he braces himself for the call ahead, a shareholder update announcing Gap's latest ugly financial numbers. Sales are flat at Old Navy. They're down 5 % at Gap stores.

16:19And across the company, gross profit has slipped by 3%. Since Peck took over as CEO, Gap's stock has lost around a third of its value. Peck takes a seat, unbuttons his blazer, and adjusts the collar of his starched white shirt. He looks more like an accountant than one of the khaki and denim-clad kids who danced through Gap's ads back in its heyday. Back then, Gap's CEO and creative directors often relied on gut instinct to decide if waistlines should be extra high or slouchy. or if tees should be slim or boxy. But months into his job as CEO, the buttoned-up Peck fired the creative directors, calling them false messiahs.

17:05Instead, Peck put his faith in numbers, not designers. Under his leadership, the chain has been relying on analytics, customer surveys, and bits of sales data for decision-making. This has turned gap stores from style setters to style followers.

17:25You know, often here on Business Wars, it's important to try to get inside the thinking of the decision maker. Let's try that here. Why would Peck approach fashion as he did? Well, data feels safe because it doesn't get embarrassed when a product flops, right? Designers do. But no spreadsheet ever invented the miniskirt of the Air Jordan. The best companies use data to filter out bad ideas, not to generate good ones, much less. new ones. It's a bit like trying to win a football game playing only defense. If you wait for the numbers to bless innovation, you'll always be three steps behind the team that's taking chances.

18:05The one bright spot for Gap Inc. isn't its namesake brand. It's Old Navy. While Gap stores languished under Peck, Old Navy surged. Its$8 billion in annual sales makes up nearly half of Gap Inc.'s total revenue. It's Old Navy keeping the company afloat. But now, Peck has decided to send it out to sea. Inside the conference room, Peck kicks off the investor call with a surprise announcement. He says Gap Inc. will be split in two. Old Navy will spin off into its own company led by their CEO, Sonia Singal. Meanwhile, Gap, Banana Republic, and fitness brand Athleta will be bundled into a new company called NuCo.

18:52NuCo? Seriously? The placeholder name makes the spinoff plan seem like it came out of nowhere. Peck insists that splitting the company in two will allow executive teams to better focus on the strengths of their brands. But when pressed for details on the conference call, Peck doesn't seem to know how this will actually work. As we continue to do the work and learn things, we're going to be as transparent as we possibly can to really show you what these two new companies look like and what the puts and takes are associated with this. But we're confident it's the right thing to do. Absolutely confident.

19:27Funny. Doesn't sound all that confident. Maybe that's because Peck's data-driven approach hasn't been the best fit for a company whose brand was once defined by laid-back vibes and casual denim. Today, though, the Gap brand is unmoored. Is it a slightly more expensive Old Navy? A slightly less expensive Banana Republic? A somewhat less hip Zara? A somewhat hipper Target? Their identity seems lost out there in the fog over the San Francisco Bay. This identity drift is showing up in the numbers, too. Since 2000, Gap Inc.'s market value has shrunk by 77%, and its annual revenue has been stalled at about$16 billion for years.

20:17This stall has forced Peck to cut costs. On the same investor call, Peck announces that the company will close 230 underperforming Gap stores around the country. Wall Street is pleased with these changes. The day after Peck announces he's splitting the company in two, shares soar 16%. But the optimism for Gap's future is short-lived. Over the next two financial quarters, net sales and gross profit continue to slide. The stock price follows. By summer of 2019, it has lost a third of its value. That fall, just days before another disastrous earnings report, Peck abruptly leaves the company. Soon after, the Old Navy spinoff plan is shelved.

21:07Gap is now on the clearance rack. But as a new CEO comes on board, the question isn't whether Gap can grow again. It's whether the brand can regain its relevance again. Gap needs a savior and fast. And it's hoping to find one in a man who once literally declared, I am a God. Enter Kanye West.

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23:59So, how did a brand once synonymous with casual American style find itself literally on fire in 2016, and by 2020, praying that a pop music god could save it. It would have been hard to imagine this back in 1969 when Donald and Doris Fisher opened the first Gap store in San Francisco. In the afterglow of the summer of love, the Fishers sensed that shoppers wanted something beyond the buttoned-up styles found in department stores. Their new shop offered Levi's in every size and a name that made a statement. The Gap, a nod to the Generation Gap of the 1960s. The Fishers were selling more than just clothes.

24:43They were selling identity. In the early years, this identity came with a fun jingle. Fall into the Gap The catchy jingle helped Gap catch on. The company expanded nationwide, went public in 1976, and in 1983 bought a quirky safari-themed chain of stores called Banana Republic. By the 1990s, the gap wasn't just growing. It was shaping culture. The brand shifted from selling Levi's to selling a vibe. One moody 1992 commercial featured British poet Max Blagg reading verses over dreamy images. A motorcycle, a jukebox, and Twin Peaks star Miat Chin Amick. Lips fit mouths, so kiss them. And the face they adorn reminds you of someone you once knew some hot night long ago, familiar as these blue jeans that fit like a glove.

25:45In 1992, Gap dropped Levi's in favor of its own brand of jeans. That same year, a 15-year-old named Kanye West took a job in a Gap store in Chicago. And just like in 1969, Gap wasn't just selling clothes. It was selling effortless, all-American cool. Right as America was embracing casual Fridays, everyone was dressing in Gap, including celebrities. A 1992 issue of Vogue featured supermodels wearing Gap. Four years later, Academy Award nominee Sharon Stone wore a$26 Gap mock turtleneck on the red carpet. She lost the Oscar, but Gap won the publicity jackpot. On Saturday Night Live, Gap girls David Spade and Adam Sandler could talk customers into buying anything.

26:35In one sketch, the girls sell Mike Myers on jeans that are as big as a tent. Those look great. Definitely. Are you sure? They're even bigger than the last pair I bought, and those were pretty huge. Did you cinch them? I tried them with a belt, but... Oh, you can't do that. You gotta cinch them. Yeah, we told you to cinch them. Meanwhile, Gap's ads became pop culture events. At the height of the swing dancing revival, a Gap commercial featured khaki-clad dancers jumping and jiving. The spot even aired during the Seinfeld finale. By the end of the 90s, it felt like Gap, like the Gap girls, could sell us anything.

27:16Their stores were clean and colorful. The brand seemed full of optimism. The business had grown from a$480 million business in 1983 to a$14 billion powerhouse in 2000. So, what went wrong? Well, in the ever-changing fashion business, nothing stays cool forever, that's for sure. Gap was so successful at selling casual basics that everyone else started selling them too. But Gap's competitors went one step further. Companies like Zara, Uniqlo, and H &M weren't just selling affordable basics. They were also selling runway looks at shopping mall prices. Gap's sales slipped in 2001, and then again in 2002.