Gap Inc. Harvard Case Solution & Analysis

Gap Inc.


The Gap Inc. is a global retailer which offers wide range of clothes, accessories to all generations around the world. . The company conducts its operations through their owned outlets as well as they have franchise agreement with many countries around the world. In addition, the company also offers its products online through the company’s established website.


The report discusses the strategic, operational and financial analysis. The major areas discussed include the following:

  • Features of  the industry
  • Current business strategies
  • Common size analysis of company’s financial statement
  • Classification of cash and cash equivalent versus short-term statement
  • Valuation of inventory
  • Derivative Financial Instruments
  • Asset retirement obligation
  • Recognition of revenue
  • Impairment of long-term assets
  • Goodwill and intangible assets
  • Financial Ratio analysis

Features of the industry

The apparel industry represents a symbol of fashion. The profitability of such industry heavily depends on effective merchandising and marketing. Large companies have an advantage in quality, distribution and marketing and could offer wide variety of products to its local as well as worldwide customers whereas, small stores usually faces difficulty in diversifying its operation and serve only on local markets.

The main advantage of the industry is that companies can be easily diversified and could enjoy a global recognition through franchising, which will offer the company high royalty and brand recognition at nil cost.

On the other hand, emerging new trends in the fashion industry increases cost because the trends go out of fashion as well as the players also suffer heavy cost of development and design of variety of products.

Current business strategies

  • The current business strategies of the company are to increase its online and international sales and to diversify its operations around the world. The company is focusing on establishing some retail stores in specific locations.
  • The company is focusing on investing more funds on design and development of wide variety of products.
  • The company is focusing on providing value priced industry. The company has a strategy to provide high-quality brands to its customers at low price.
  • The company is also concerned about the interest of shareholders. The company has a long-term strategy to increase the value of shareholders.

These strategies would enable Gap to capture market around the world and to focus on specific target markets without deviating from their core competency. On the other hand, diversification requires heavy cost and is a high-risk approach. On the other hand, franchising will be a better option but at the cost of loose control.

Players can only be succeeding to survive in the market if they regularly innovate products with unique design and features. On the other hand, fashion industry has an inherent risk that the products go out of trend immediately and enable a company to suffer heavy cost of design and marketing.

Common size analysis of company’s financial statements

  • Common size analysis of Income Statement

The company succeeds to achieve sales growth by 3.17% over last year. The COGS as a percentage of sales has increased from 60.6% to 61% this year. Although, this is a slight increment but this causes the company to lose the gross profit margin from 39.4% to 39% this year.

The company also reported a reduction in operating expenses as a percentage of sales from 27% to 25.7% which is a good indication and causes the company to enjoy increased operating profit margin from 12.4% to 13.3% this year.

Although, the revenue of the company has been increased but the interest expense has been decreased from 0.6% to 0.4% over the last year which indicates that the company expands its operations but not at the cost of increased debt financing..................

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