WEBVTT - Gap's Quest to Stay Cool Just Hit Its Latest Roadblock: Tariffs

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. At the start of

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<v Speaker 1>twenty twenty five, it looked like Gap was in the

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<v Speaker 1>middle of a renaissance or a gap aisance. That's what

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<v Speaker 1>New York Magazine's product review site, The Strategist called it.

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<v Speaker 1>The once cool clothing company seemed like it might be

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<v Speaker 1>in again. It dropped an ad campaign with the actress

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<v Speaker 1>Parker Posey in the midst of her white Lotus pressed tour.

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<v Speaker 1>It launched new product lines and brand collapse, which, judging

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<v Speaker 1>by the response on social media, were landing well with

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<v Speaker 1>younger shoppers.

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<v Speaker 2>I influenced you to buy anything. Let it be these

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<v Speaker 2>Gap genes.

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<v Speaker 1>No, we've all been waiting. Let's try and everything I

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<v Speaker 1>got from the Gap Done collab.

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<v Speaker 3>This is like truly my Super Bowl.

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<v Speaker 2>I just got the full inventory list for the Mad

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<v Speaker 2>Happy X Gap collab. Let's go through this collection twenty five.

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<v Speaker 1>It's going to be the year of Gap. After going

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<v Speaker 1>through five CEOs in twenty years, the company's current CEO,

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<v Speaker 1>Richard Dixon, was settling into the role.

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<v Speaker 4>I sort of grew up with Gap as the iconic

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<v Speaker 4>American style that we all knew and loved, and I

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<v Speaker 4>have found myself really interested in turnaround stories, and he.

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<v Speaker 1>Was feeling optimistic he could help write gaps turnaround story.

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<v Speaker 2>I think that there were strong signs that the gap

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<v Speaker 2>azance was beginning.

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<v Speaker 1>Bloomberg's Amanda Mole has been tracing gaps ups and downs

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<v Speaker 1>with her colleague Bloomberg Specialty retail reporter lillly Meyer.

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<v Speaker 3>And with Gap, it's always kind of been this whack

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<v Speaker 3>a mole problem because they have now these four brands,

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<v Speaker 3>and each brand has had a moment of being really

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<v Speaker 3>successful and then a moment of really struggling.

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<v Speaker 1>And then Trump's tariffs hit, and Gap found itself in

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<v Speaker 1>the center of a new, unprecedented challenge as a global

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<v Speaker 1>brand navigating a trade war that promised to up end

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<v Speaker 1>supply chains and transform consumer habits. I'm Sarah Holder, and

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<v Speaker 1>this is the big take from Bloomberg News Today. On

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<v Speaker 1>the show, we explore how new trends and new terraces

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<v Speaker 1>have rocked the retail industry and complicated gaps latest efforts

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<v Speaker 1>to turn its business around. Amanda, give me the Gap

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<v Speaker 1>origin story. When was this iconic brand born.

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<v Speaker 2>It was the Summer of Love, but literally it was

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<v Speaker 2>nineteen sixty nine. Donald and Doris Fisher or living in

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<v Speaker 2>San Francisco. They founded the store and like a single

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<v Speaker 2>storefront to sell Levi's and records to the sort of

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<v Speaker 2>like cool countercultural kids that were hanging out in the

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<v Speaker 2>city at the time. It was a time of like

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<v Speaker 2>real experimentation in retail, so they had the single storefront.

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<v Speaker 2>It was a hit. They started making their own clothes.

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<v Speaker 2>It was sort of a time where a lot of

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<v Speaker 2>American specialty retailers were trying to figure out like what

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<v Speaker 2>a store was going to be in the decades to come,

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<v Speaker 2>and the Fishers and Gap were front and center.

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<v Speaker 1>The Gap of the seventies was all about flared deans

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<v Speaker 1>and boldly patterned shirts. It didn't really become the Gap

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<v Speaker 1>we know today until the eighties. That's when the company

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<v Speaker 1>hired Mickey Drexler as CEO. He'd helped turn around and

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<v Speaker 1>Taylor's business, and the Fishers were hoping that he could

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<v Speaker 1>also help Gap.

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<v Speaker 2>This was the early eighties. The American mall was growing

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<v Speaker 2>at a rapid pace. There was all these new types

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<v Speaker 2>of shopping centers opening around the country that needed stores,

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<v Speaker 2>and there was like a real opportunity as like the

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<v Speaker 2>country casualized and work casualized young people were looking for

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<v Speaker 2>like the next way to dress. So what Drexler did

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<v Speaker 2>sort of famously was strip out a lot of the

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<v Speaker 2>experimentation that they were doing and be like, we're just

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<v Speaker 2>going to make really great basics and we're going to

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<v Speaker 2>make them cool. So they sort of like married the

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<v Speaker 2>jeans and buttoned down and t shirt business to this

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<v Speaker 2>idea of cultural relevance. They recruited a lot of celebrities

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<v Speaker 2>and taste makers and like sort of cultural figures like

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<v Speaker 2>Spike Lee and Joan Didion.

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<v Speaker 1>Joined didon with Kantana Rue wearing the black turtleneck Yes Yes.

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<v Speaker 2>And they hired like the best art and fashion photographers

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<v Speaker 2>and the world people who were shooting for Vogue to

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<v Speaker 2>shoot Gap ads, to shoot just cool people in like

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<v Speaker 2>straightforward clothes that a lot of people could imagine themselves wearing,

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<v Speaker 2>and you know, sold a lot of jeans in the

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<v Speaker 2>eighties and nineties that way.

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<v Speaker 1>Amanda says. Another stroke of nineties era, Mickey Drexler Genius

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<v Speaker 1>was launching a new brand under the Gap umbrella that

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<v Speaker 1>offered choppers a cheaper option old Navy.

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<v Speaker 2>They saw that other companies were sort of onto them

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<v Speaker 2>as far as like, oh, we can make jeans and

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<v Speaker 2>T shirts cool and we can undercut Gap on price.

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<v Speaker 2>So Gap is a company basically said, well, you know,

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<v Speaker 2>we might lose some customers to lower priced lines that

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<v Speaker 2>offer similar clothing, but we can also open a lower

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<v Speaker 2>priced line of similar clothing, and Gap might lose the

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<v Speaker 2>sales as far as Gap brand, but Gap the company

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<v Speaker 2>will retain the sales. We'll just go to Old Navy.

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<v Speaker 1>Old Navy helped the company stay relevant even as the

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<v Speaker 1>Gap brand face new headwinds in the early two thousands

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<v Speaker 1>and twenty tens. That's when customers started shifting away from

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<v Speaker 1>Gap stores and towards online retailers and fast fashion brands

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<v Speaker 1>like Zara and H and M that could produce basics

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<v Speaker 1>for a fraction of the price.

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<v Speaker 2>And then you at the same time, Gap sort of

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<v Speaker 2>meets that moment. As a retailer with like a ton

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<v Speaker 2>of debt, a lot of leases in malls that they

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<v Speaker 2>don't necessarily want to be in anymore, they had the

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<v Speaker 2>makings of trouble down the road, and suddenly they were

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<v Speaker 2>down the road.

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<v Speaker 1>Debt, bad real estate bets. These were real problems for

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<v Speaker 1>Gap ones that Lily Meyer says the company tried to

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<v Speaker 1>address through a series of corporate side quests. In two

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<v Speaker 1>thousand and six, it launched an online shoe and accessory

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<v Speaker 1>company called Piperlme, hoping it could compete with Zappos, and

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<v Speaker 1>then shut it down less than a decade later. In

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<v Speaker 1>two thousand and eight, it took over an athletic brand, Athleta,

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<v Speaker 1>which the company still owns. In twenty twelve, it acquired

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<v Speaker 1>the trendy fashion brand Intermix, then sold it to a

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<v Speaker 1>private equity firm in twenty twenty one.

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<v Speaker 3>It kind of kept stuttering again and again. All the

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<v Speaker 3>while their core business was still struggling as well.

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<v Speaker 1>The core business of Gap Inc.

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<v Speaker 2>Gap Gap, the brand was getting smaller and smaller and smaller.

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<v Speaker 2>It brings in like half the revenue of peak Gap,

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<v Speaker 2>which was two thousand and three.

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<v Speaker 1>Two thousand and three was GAP's high revenue watermark. It

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<v Speaker 1>made a record seven point three billion dollars. But by

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<v Speaker 1>the twenty twenties, Peak Gap was squarely in the rear

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<v Speaker 1>view mirror, and the company decided to bring on a

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<v Speaker 1>fresh face to stage a comeback. Richard Dixon. Dixon had

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<v Speaker 1>joined Gaps board in twenty twenty two while he was

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<v Speaker 1>still an executive at the toy company Mattel, which makes

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<v Speaker 1>Barbie dolls, and in the lead up to the Barbie

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<v Speaker 1>movie premiere in twenty twenty three, with Barbie Mania in

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<v Speaker 1>full swing, Dixon got his next opportunity. That August, he

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<v Speaker 1>became GAP CEO. Amanda and Lily sat down with Dixon

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<v Speaker 1>earlier this year for several recorded interviews.

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<v Speaker 3>He had noticed that the Gap brand website was really

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<v Speaker 3>hard to shop on. It was really hard to find

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<v Speaker 3>what you wanted, and so he took a group of

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<v Speaker 3>his executive shopping. As he described it to us, We.

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<v Speaker 4>Got together in the room and I was new and

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<v Speaker 4>I said, look, you know what we're going to do.

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<v Speaker 4>We're going to go shopping. And I pulled up the

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<v Speaker 4>sites and we spent the next couple of hours like

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<v Speaker 4>basically melting down the organization to deal with truth. Do

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<v Speaker 4>we think that we're telling really great compelling narratives around

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<v Speaker 4>our story and merchandising and why we exist.

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<v Speaker 1>He also held a town hall for Gap employees where

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<v Speaker 1>he delivered some tough love.

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<v Speaker 4>I acknowledged to the company there's a positivity bias in

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<v Speaker 4>this company. I sit meetings and you're all telling me

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<v Speaker 4>how great things are. But then you look at the business,

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<v Speaker 4>you go to our stores, you go online, you hear

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<v Speaker 4>the drum beat in the outside world, and they think

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<v Speaker 4>very differently. So what's happening in here? The company just

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<v Speaker 4>wasn't dealing with the truth.

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<v Speaker 1>He suggested that clinging too hard to the past might

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<v Speaker 1>be holding GAP back.

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<v Speaker 4>We were living in a legacy. Well remember when in

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<v Speaker 4>the Khaki campaign, It's like, Okay, well what is it today?

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<v Speaker 1>Gap faces the facts and Trump's tariffs after the break.

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<v Speaker 1>By the time CEO Richard Dixon took the reins of

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<v Speaker 1>Gap in twenty twenty three, the company had been through

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<v Speaker 1>many a turnaround effort. Not all of it had worked,

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<v Speaker 1>but some of the seeds have changed. The company had

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<v Speaker 1>planted were starting to sprout. There was a collaboration with

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<v Speaker 1>Doenne and La It Girl brands that really took off.

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<v Speaker 4>Our brands are becoming more culturally relevant. People are starting

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<v Speaker 4>to say, like, wow, Gaps pretty cool.

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<v Speaker 1>The company also cut back on how many products it

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<v Speaker 1>sold and a play to be more focused on its

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<v Speaker 1>core brand, and Amanda and Lily said Gap also figured

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<v Speaker 1>out a way to better keep up with fast moving trends.

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<v Speaker 2>One thing that really is like difficult for legacy clothing

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<v Speaker 2>brands when they're trying to compete with fast fashion, is

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<v Speaker 2>that the sort of turnaround time between design and product

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<v Speaker 2>in store is just really long compared to what other

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<v Speaker 2>brands can do. So they did something that seemed pretty smart,

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<v Speaker 2>which is now they order textiles ahead of time and

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<v Speaker 2>in roughly the same timeline that they used to, but

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<v Speaker 2>they don't like commit to designs with those textiles until

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<v Speaker 2>like the last possible second, so you could get the

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<v Speaker 2>exact right billowy shirt, the exact length of pant that

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<v Speaker 2>people are looking for.

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<v Speaker 1>Yeah, that sounds so smart, Just like buying the fabric

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<v Speaker 1>and then being like, you tell me the shape. The

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<v Speaker 1>TikTok will tell me the shape.

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<v Speaker 2>Yes, yes, yeah, you wait until you know what people

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<v Speaker 2>actually want, which means that you don't have to discount

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<v Speaker 2>as much. It means that you don't make as much

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<v Speaker 2>product that doesn't get sold or doesn't get used in

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<v Speaker 2>some way.

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<v Speaker 1>Okay, so Gap had some good stuff going on. How

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<v Speaker 1>did Dixon try to build on the success? What were

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<v Speaker 1>some of the things that are truly Dixon branded efforts?

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<v Speaker 3>So probably one of the most notable ones is Dixon

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<v Speaker 3>bringing on Zach Posen, who's this fashion designer. He was

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<v Speaker 3>on Project Runway. He's had lines with other companies, and

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<v Speaker 3>Posen has since done a lot of Gap looks for runways.

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<v Speaker 3>He's dressed celebrities like Anne Hathaway, and he's also created

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<v Speaker 3>a new line called The Gap Studio, which is a

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<v Speaker 3>bit higher end and a little bit more avant garde.

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<v Speaker 1>That secret sauce Gap had in the nineties, essentially making

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<v Speaker 1>basics cool by putting them on cool people. Dixon was

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<v Speaker 1>bringing it back. This all created that gap aissance feeling

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<v Speaker 1>we were talking about earlier, the sense that this time

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<v Speaker 1>this rebound might stick.

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<v Speaker 2>There were a lot of pieces of circumstantial evidence that

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<v Speaker 2>things were head in the right direction, Like their young

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<v Speaker 2>consumer numbers were up. They were seeing people coming back

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<v Speaker 2>to the brand who had like not bought anything there

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<v Speaker 2>in years and years. Sales in general were good.

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<v Speaker 1>And then on April second, Donald Trump announced his aggressive

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<v Speaker 1>reciprocal tariffs on trading partners around the world. Lillly and

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<v Speaker 1>Amanda were actually with Dixon in a conference room the

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<v Speaker 1>day the news hit.

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<v Speaker 2>So we were in this interview and we talked in

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<v Speaker 2>sort of like general terms about the tariffs but like

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<v Speaker 2>the room was stealed. None of us had our phones

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<v Speaker 2>out and there was no TV playing. But like we

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<v Speaker 2>all got outside and sort of looked at our phones

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<v Speaker 2>and were like, ah, oh okay. You know, things were

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<v Speaker 2>like a lot worse than we all expected.

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<v Speaker 1>There were steep tariffs planned for Vietnam, which applied more

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<v Speaker 1>than a quarter of the company's goods last fiscal year,

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<v Speaker 1>and steeper tariffs on China, though the country accounted for

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<v Speaker 1>less than ten percent of GAPS assortment last year. Dixon,

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<v Speaker 1>like many CEOs in his position, had to start thinking

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<v Speaker 1>about how to adapt.

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<v Speaker 2>We know that he got on the phone pretty quickly

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<v Speaker 2>with his CFO and their head of supply and logistics.

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<v Speaker 4>What if we increased production in the US why not?

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<v Speaker 4>What if we diversified our footprint even more? What if

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<v Speaker 4>I went to the administration? Why not?

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<v Speaker 1>After Liberation Day, Dixon ultimately did fly to DC to

0:12:21.760 --> 0:12:23.200
<v Speaker 1>meet with the President himself.

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<v Speaker 4>We are the single largest specialty in parao detail in

0:12:26.360 --> 0:12:31.040
<v Speaker 4>the country. We employed over seventy thousand people. The indirect

0:12:31.040 --> 0:12:37.720
<v Speaker 4>consequence of those tariffs could impact our store openings or

0:12:37.800 --> 0:12:42.880
<v Speaker 4>even have the closed stores because they just become they

0:12:42.880 --> 0:12:48.000
<v Speaker 4>don't become profitable, explaining those different scenarios to the administration

0:12:48.120 --> 0:12:50.880
<v Speaker 4>and the context of our support for their intent, but

0:12:51.000 --> 0:12:54.480
<v Speaker 4>the indirect and or direct consequences to our business is

0:12:54.559 --> 0:12:55.800
<v Speaker 4>a real dialogue.

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<v Speaker 1>By May, many of the tariffs had been paused and

0:13:00.400 --> 0:13:03.400
<v Speaker 1>GAPS leaders were developing a plan to deal with them.

0:13:04.000 --> 0:13:07.040
<v Speaker 1>But anyway they crunched the numbers, tariffs were going to

0:13:07.080 --> 0:13:10.360
<v Speaker 1>impact their bottom line. The CFO delivered the news to

0:13:10.400 --> 0:13:13.240
<v Speaker 1>investors on an earnings call on May twenty ninth.

0:13:13.400 --> 0:13:17.480
<v Speaker 3>We estimate a gross incremental cost of approximately two hundred

0:13:17.480 --> 0:13:20.760
<v Speaker 3>and fifty million to three hundred million dollars.

0:13:20.800 --> 0:13:24.520
<v Speaker 1>Two hundred and fifty to three hundred million dollars. The

0:13:24.520 --> 0:13:28.240
<v Speaker 1>COFO said the company's mitigation strategies could cut that number

0:13:28.240 --> 0:13:30.679
<v Speaker 1>in half, but the company was still looking at a

0:13:30.679 --> 0:13:33.400
<v Speaker 1>loss of up to one hundred and fifty million dollars

0:13:33.480 --> 0:13:38.400
<v Speaker 1>this year. Lily says the market reaction was intense. The

0:13:38.440 --> 0:13:41.320
<v Speaker 1>company stock plunged more than twenty percent in just a

0:13:41.360 --> 0:13:42.000
<v Speaker 1>few hours.

0:13:42.360 --> 0:13:42.800
<v Speaker 2>That day.

0:13:42.880 --> 0:13:46.320
<v Speaker 3>Gap lost about two billion in market cap, despite having

0:13:46.480 --> 0:13:51.160
<v Speaker 3>really strong earnings and showing some strategies for mitigation, like

0:13:51.640 --> 0:13:55.640
<v Speaker 3>changing their sourcing and switching to some American grown.

0:13:55.480 --> 0:13:58.520
<v Speaker 1>Client Yeah let's talk about some of those mitigation strategies.

0:13:58.920 --> 0:14:02.280
<v Speaker 1>How well is GAP positions to adapt to these tariffs

0:14:02.320 --> 0:14:04.560
<v Speaker 1>compared to some of its competitors in the retail space.

0:14:04.920 --> 0:14:07.240
<v Speaker 3>I mean, I think one thing that really helps GAP

0:14:07.320 --> 0:14:09.480
<v Speaker 3>is how big the company is and how big their

0:14:09.600 --> 0:14:11.640
<v Speaker 3>order sizes are, so it makes it a little bit

0:14:11.679 --> 0:14:14.960
<v Speaker 3>easier for, you know, the company to entice factories in

0:14:15.000 --> 0:14:18.319
<v Speaker 3>other countries. So one of their goals is they want

0:14:18.440 --> 0:14:21.280
<v Speaker 3>no country to account for more than twenty five percent

0:14:21.880 --> 0:14:25.080
<v Speaker 3>of supply by the end of this year, which they're

0:14:25.360 --> 0:14:28.440
<v Speaker 3>in the process of doing. They also plan for China

0:14:28.520 --> 0:14:30.320
<v Speaker 3>to be less than three percent by the end of

0:14:30.320 --> 0:14:30.760
<v Speaker 3>this year.

0:14:31.600 --> 0:14:35.160
<v Speaker 1>After so many years dealing with factors within Gaps control

0:14:35.520 --> 0:14:40.240
<v Speaker 1>company culture, brand relevance, debt, GAP is now up against

0:14:40.280 --> 0:14:43.280
<v Speaker 1>a new external challenge, a trade war.

0:14:43.760 --> 0:14:46.280
<v Speaker 2>They are still so early in the turnaround, and like

0:14:46.360 --> 0:14:49.560
<v Speaker 2>people want like hard and fast answers about like is

0:14:49.600 --> 0:14:50.920
<v Speaker 2>it going to work? Is it going to happen? And

0:14:50.960 --> 0:14:53.640
<v Speaker 2>it's just like impossible. As it's all right now, they

0:14:53.640 --> 0:14:55.440
<v Speaker 2>have like a lot of stuff left to do in

0:14:55.520 --> 0:14:57.400
<v Speaker 2>order to like continue to stabilize the company.

0:14:58.400 --> 0:15:01.920
<v Speaker 1>And Amanda says, for a nic American brand that's managed

0:15:01.960 --> 0:15:05.600
<v Speaker 1>to survive the rise of online shopping, the retail apocalypse,

0:15:05.960 --> 0:15:09.640
<v Speaker 1>and the fast fashion revolution. The question of whether Gap

0:15:09.680 --> 0:15:13.200
<v Speaker 1>can stick the landing matters to more than just as CEO,

0:15:14.160 --> 0:15:17.520
<v Speaker 1>because Gap, with its crisp white teas and blue jeans,

0:15:18.080 --> 0:15:20.600
<v Speaker 1>has something going for it that some of its trendiest

0:15:20.600 --> 0:15:23.840
<v Speaker 1>peers just can't compete with history.

0:15:24.400 --> 0:15:26.280
<v Speaker 2>Something that really stood out to me when trying to

0:15:26.760 --> 0:15:28.880
<v Speaker 2>wrap my arms around what was happening with all of this,

0:15:29.000 --> 0:15:32.640
<v Speaker 2>is just how much other people, like just in general,

0:15:32.720 --> 0:15:35.360
<v Speaker 2>like really want Gap to be good, really want to

0:15:35.360 --> 0:15:38.160
<v Speaker 2>buy clothes a Gap, want to feel good about shopping there,

0:15:38.240 --> 0:15:41.920
<v Speaker 2>want to feel like there is something there for them. Companies,

0:15:42.000 --> 0:15:44.600
<v Speaker 2>especially in twenty twenty five, do not generally have this

0:15:44.840 --> 0:15:49.720
<v Speaker 2>like positive nostalgic feeling from the general public. But like,

0:15:50.200 --> 0:15:52.400
<v Speaker 2>basically everyone I talked to of like a bunch of

0:15:52.400 --> 0:15:55.920
<v Speaker 2>different ages, a bunch of different backgrounds. Everybody was like,

0:15:55.960 --> 0:15:57.840
<v Speaker 2>I loved shopping there, it was so cool when I

0:15:57.880 --> 0:15:59.520
<v Speaker 2>was a kid, or like I really wanted my mom

0:15:59.520 --> 0:16:02.640
<v Speaker 2>to take me. It's sort of rare that you encounter

0:16:02.720 --> 0:16:07.200
<v Speaker 2>that many people like rooting for a company.

0:16:09.080 --> 0:16:11.960
<v Speaker 1>This is the big take from Bloomberg News I'm Sarah Holder.

0:16:12.360 --> 0:16:15.120
<v Speaker 1>To get more from The Big Take and unlimited access

0:16:15.120 --> 0:16:18.680
<v Speaker 1>to all of bloomberg dot com, subscribe today at Bloomberg

0:16:18.720 --> 0:16:22.280
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0:16:22.440 --> 0:16:25.040
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0:16:28.160 --> 0:16:30.280
<v Speaker 1>Thanks for listening. We'll be back tomorrow