Will Old Navy Cannibalize Gap Sales?

-33.78%
Downside
27.29
Market
18.07
Trefis
GPS: Gap logo
GPS
Gap

Gap (NYSE:GPS) is a global specialty retailer that operates the ‘Gap’ and ‘Old Navy’ brands, and competes with retailers such as Aeropostale (NYSE:ARO), American Eagle (NYSE:AEO), Abercrombie & Fitch (NYSE:ANF) and Urban Outfitters (NYSE:URBN).

We estimate that Gap and Old Navy stores each constitute roughly 28% of our $32.51 our price estimate for Gap’s stock, which sits well above market price.

Relevant Articles
  1. Does Gap Stock Have More Room To Run After Rising 67% This Year?
  2. Gap Q2 Earnings: What Are We Watching?
  3. Gap Stock Has Upside Potential To Its Pre-Inflation Peak
  4. Gap’s Stock Looks Expensive At $14
  5. Will Gap Stock Trade Lower Post Q3 Results?
  6. Gap’s Q2 Earnings Preview: What Are We Watching?

Revenue per Square Foot

Between 2005 and 2008, the revenue per square foot for Gap stores fell from $430 to $390 while Old Navy revenue per square foot fell from $370 to $260.  Failed marketing campaigns resulted in weak sales and over expansion exacerbated declines in revenue per square foot. The $66 billion (in 2005) specialty clothing industry increased at an annual growth rate of nearly 3% from 2005 to 2008.  During this period, Gap’s market share slid downward by 4%.

However, in 2009, the revenue per square foot for both Gap and Old Navy stores increased, while those for competitors like Abercrombie & Fitch and American Eagle fell. We believe this is an inflection point in the revenue per square foot for these two Gap brands.

See our full analysis and $32.51 price estimate for Gap

We expect the revenue per square foot for Gap stores to increase to around $460 by the end of our forecast period, from nearly $400 in 2009.

We expect the revenue per square foot for Old Navy stores to increase to around $340 by the end of our forecast period, from nearly $270 in 2009.

Though the YOY comparable store sales for Gap and Old Navy in North America were down by 8% and 2% respectively for December, they did considerably well in the preceeding two months. Comparable store sales for Gap in North America were up 5% YOY in November 2010 while company-wide comparable store sales increased 4%. [1]

This growth continued a trend from October, which saw comparable store sales for Gap in North America up 5% YOY. For Gap’s more budget focused brand, Old Navy, comparable store sales in November also rose 5%. Year-to-date, company-wide comparable store sales are up 1% for Gap. [2] [3]

Old Navy has the Potential to Cannibalize Sales from Gap

Gap and Old Navy brands are differentiated by their pricing points, with Old Navy being the value priced brand. However, they do target similar age groups, meaning that Gap sales are susceptible to cannibalization by Old Navy. This possibility is heightened by the recent economic downturn, which made consumers more cautious regarding discretionary spending.

The following list highlights factors that could work in favor of Old Navy:

  • Marketing Strategy – Old Navy has successfully redefined its customer target group and positioning as an energetic brand with trendy products at compelling prices. The brand has also used localized promotional campaigns and inventory mark downs to successfully reach out to its target audience – young moms shopping for their families and themselves.
  • Real Estate Strategy – The company has also been able to successfully drive traffic by purchasing retail space effectively for this segment and locating Old Navy stores in strip malls where middle class families might browse shops.
  • Operational Discipline – Old Navy’s commitment to operational discipline, especially around inventory management and average unit costing has helped the brand to improve its merchandise margin and achieve higher ‘revenue per store’ numbers as compared to the other Gap brands.

The following list highlights factors that could work against Gap:

  • Loss in Brand Value – Towards the end of the 90’s, Gap started losing touch with emerging fashion trends. In addition to this, a string of failed promotional campaigns during the first half of the last decade caused Gap to lose connection with its customer base and hindered the company’s ability to define clothing trends for urban America, as it had in the previous two decades.
  • Large Acquired Asset Base – The large asset base acquired by the company for its Gap stores during the peak of the brands popularity has had a huge negative impact on its operations and profitability during the following slump. The company was only able to significantly cut down the brand’s store count in a phased manner. Since 2001, the brand has had to close down 50% of its stores, with room for still more shutdowns.
Notes:
  1. Gap Reports November Sales []
  2. Gap Reports December Results []
  3. Gap Reports October Sales []