The CEO of Athleta explains why the brand has been successful, and it's a stark reminder of why Gap is struggling

athleta main floorBethany Biron/Business Insider

  • Athleta has become one of Gap's biggest sweet spots.
  • The buzzy chain is in "high growth mode," opening stores and acquiring new customers, CEO Nancy Green said.
  • The brand stays relevant and staves off heavy discounting by having a reactive business model, creating and producing apparel based on demand. This is an area where sister brand Gap has lacked, according to analysts.
  • Visit Business Insider's homepage for more stories.

Athleta has become one of Gap's biggest sweet spots, endearingly referred to by analysts as one of its "crown jewels," along with the recently spun-off Old Navy.

It's becoming a symbol of everything that Gap isn't - it's a buzzy chain that's in "high growth mode" (according to its CEO Nancy Green), acquiring new customers, and opening stores while its big sister is forced to scale back, shutter hundreds of locations, and figure out how to make itself relevant again.

Gap Inc. CEO Art Peck said that management has its work cut out when it comes to getting the Gap brand back on track, but he can breathe easy when it comes to Athleta.

"I have zero concerns about the health of Athleta, zero concerns about the health of the brand, zero concerns about customer engagement," he said in an earnings call in May.

Athleta 14Business Insider/Sarah Schmalbruch

What is Athleta doing right that Gap is doing wrong?

One of the biggest criticisms of Gap in recent years has been its constant and heavy discounting. Analysts say shoppers are now hooked on these deals and increasingly unwilling to pay full price.

At Athleta discounting is scarce by comparison, and it's reserved to the store's semi-annual sales.

"Consumers are used to paying full price for product and are usually willing to do so," Neil Saunders, managing director of GlobalData Retail, wrote in an email to Business Insider.

Athleta's CEO, Nancy Green, explained on a recent call with Business Insider that this pricing strategy is an important part of its business model as it builds out the brand.

But discounting isn't a hobby of retailers. It's usually done out of need, and there are three key ways Athleta largely manages to avoid putting too many things in the sale section: pricing product correctly, having a tight control on inventory levels, and creating apparel that shoppers really want.

The last two are aided by Athleta's reactive business model, Green said.

"When we launch and put a product out, we work on a strong responsive timeline so that we can make sure that we can respond to demand quickly versus going out with too much and being stuffed," she said. "You have to create a lot of flexibility when you are in the women's fashion business so that you can move to where the right demand is."

By more closely monitoring consumers' response to products and reacting to changing trends, Athleta stays on the mark.

Read more: These are the tricks that Zara uses to figure out the styles you want before you even do

Spanish fashion giant Zara is the king of this business model, and it's part of the reason why analysts say it has been so successful at staying ahead of trends and thrived in the age of e-commerce. Zara's demand-driven approach keeps stock at manageable levels, prevents heavy discounting, and ultimately preserves profit margins.

But this is exactly what Gap doesn't do, Saunders said, adding that it instead "churns out" the same products in large volumes that become highly vulnerable to discounting.

"In today's apparel market the market there is a problem of saturation - too much product sold in too many stores. Good retailers don't just add to that bulk, they carve out niches in which they can do well," he said.

Athleta is also intensely focused on ensuring that it has a strong set of core styles that customers known they can count on and come back and buy. Customers are more likely to pay full-price for good-quality, staple styles.

But Athleta is not without its own struggles. The brand faces increased pressure to keep up the momentum as the athletics wear and athleisurewear market becomes increasingly saturated.

Green acknowledged the competition but isn't worried.

"We are designing for an active woman and girl's full life. It's not about an of-the-moment athleisure fashion trend, it's about creating the right products that work for her lifestyle, whether she's going to a yoga class, going to train, running a marathon, getting into work - servicing this woman's whole lifestyle is where we have been very very successful."

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