Gap is the latest retailer get into resale to try to fix its business - CNBC

Holiday shoppers take part in early Black Friday shopping deals at the Gap store in Times Square in New York.

Brendan McDermid | Reuters

Gap is the latest retailer to dip its toes into the secondhand apparel market, following the lead of Macy's, Nordstrom and others, in a bid to stay relevant in an industry shaken by changing consumer tastes.

The company announced Thursday it has partnered with resale platform ThredUp, which bills itself as the largest online consignment and thrift store. In select Gap, Banana Republic, Athleta and Janie and Jack stores, shoppers will now be able to drop off their used clothes, in exchange for credits to use at Gap's portfolio of stores.

Macy's, J.C. Penney and J.Crew's Madewell brand are three of the five retailers that have partnered with ThredUp in recent months, hoping to get a piece of what analysts say is a consumer trend still in its infancy. The verdict is still out, however, on whether these efforts will drive people to stores and boost sales. The way in which each retailer partners with ThredUp can also vary.

Macy's has 40 ThredUp pop-up shops within its stores today, where customers can get their hands on discounted American Eagle and Victoria's Secret garb, among other brands, curated by ThredUp. Penney has 30 such locations that it is testing. Madewell has five of the ThredUp pop-ups.

Taking a slightly different approach, Nordstrom last month launched its own resale shop, called "See You Tomorrow." Shoppers can browse used apparel online and at Nordstrom's recently opened flagship store in New York. The company said it is stocking See You Tomorrow with items that are returned, and then cleaned and refurbished, if damaged. Its website lists a pair of used Rag & Bone jeans, for example, on sale for $90 to $99 (depending on size), compared with a typical sticker price of $195 — or a discount of more than 50%.

The inside of See You Tomorrow at Nordstrom's flagship store in New York.

Source: Nordstrom

Similar to Gap, Nordstrom is also offering shoppers gift cards if they donate their used clothes at Nordstrom's New York locations. The department store said it plans to soon launch its own intake program for secondhand items online.

"I think it is becoming table-stakes that brands and retailers are making a statement that they support sustainability," said Melissa Gonzalez, CEO of retail consulting agency The Lionesque Group. "We can't deny there is a movement. ... Some are putting more dollars behind it than others. For some, it will work better than others."

Still, "it's early to see how much companies will be able to monetize this," Gonzalez said. "Consumers want to know a brand stands for something."

Companies are touting consumers' willingness to shop secondhand, but they don't break out revenue, making it harder to judge any financial impact this has on these businesses.

"Through extensive research ... we know consumers appreciate new brands, as well as an engaging experience to find the unexpected," Michelle Wlazlo, Penney executive vice president and chief merchant, said in a statement. "The customer demand for secondhand is strong, and our thredUP partnership allows shoppers to find select national brands for the first time ever inside our stores."

Macy's, Nordstrom and Madewell didn't immediately respond to CNBC's requests for comment about how their initiatives have been performing.

'Early innings'

What is clear, however, is that the resale market as a whole is worth billions of dollars, and its growth is explosive.

The overall resale market in the U.S. today is valued at roughly $20 billion, with the potential to reach $33 billion by 2022, according to a report by Cowen & Co. in November.

The resale market represents a meager 6% of the total apparel and footwear industry in the U.S. today, Wells Fargo analyst Ike Boruchow said. That should grow to roughly 10% by 2022 by his estimates, stealing share from traditional apparel players. "The consumer's willingness to transition to resale is in the very early innings," Boruchow said.

The burgeoning resale trend comes as apparel retailers struggle to grow. There have been numerous bankruptcies in the sector, from American Apparel to Wet Seal to Charlotte Russe to Forever 21. Others are suffering financially and closing stores to cut costs. This past holiday season was especially tough, with Kohl's, Macy's and Walmart each citing apparel as a weak spot.

It appears the pain has continued, too. Receipts at clothing stores dropped 3.1% in January, the most since March 2009, the Commerce Department said earlier this month.

Gap has felt this pain. It ousted CEO Art Peck in November, and it called off plans to spin off Old Navy into a separate public company in January, as its sales slowed. On the heels of the 2019 holiday season, Gap is calling for total same-store sales and net sales in fiscal 2019 to be down mid-single digits and down low-single digits, respectively. Its stock has fallen about 30% over the past 12 months.

Department stores especially need a fix. These multiline retailers made up 22% of retail sales in 2008 but now are expected to see their share shrink to 9% by 2028, according to data pulled by GlobalData Retail.

New life for excess inventory

Getting into resale presents an opportunity for companies to extend the life of a dress or pair of pants, while hopefully earning an extra purchase, and tackling the problem of excess inventory, Cowen said.

About 15% to 20% of the total U.S. apparel, footwear and accessories market is considered excess inventory, such as unsold clothing and returns, Cowen said. And about 10% of the market gets either destroyed or donated, according to the firm.

To be sure, a department store chain selling a used pair of jeans could also mean not selling a pair of jeans at full price. And that could be a ding to profitability.

"There's some risk of cannibalizing higher-margin sales on new goods," said Greg Petro, CEO of consulting group First Insight.

But "the combination of curated product offerings and sustainability will certainly drive net-positive sales," he said.

Fifty-six million women bought secondhand items in 2018, up 27% from a year earlier, according to an annual report by ThredUp and GlobalData Retail. Fifty-one percent of resale shoppers say they plan to spend more on secondhand goods in the next five years, the report said.

Furthermore, and what should come as good news for Macy's and Gap: Nearly one-third of consumers surveyed said they would spend more money with their favorite retailers if those companies also sold secondhand apparel in stores or online.

"Our partners are getting access to great product ... and we are getting brand awareness," ThredUp founder and CEO James Reinhart told CNBC about his company's partnerships with the likes of Madewell and department store Stage Stores, its first retail partner. "People forget how much Macy's sells every year. I think we are learning a lot from them ... and they are learning from us."

ThredUp is spending a lot of its latest $175 million capital infusion working on the technology "to route and support a network of stores," he said. "These investments have been so we can bring on new partners."

Ultimately, ThredUp must figure out how to make sure supply meets demand — that it has enough inventory coming in from consumers, via Gap stores or in the mail, to sell on its website and in the Macy's, Penney, Stage and Madewell pop-ups.

ThredUp is considered the leading platform in its space and has processed more than 100 million pieces of clothing over the past 10 years. The business was started in 2009. Other similar secondhand purveyors include Poshmark and The RealReal.

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