Gap Facing Profit Margin Pressure in 2011

June 1st, 2011 by Trefis Team
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GPS: Gap logo
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Gap (NYSE:GPS) reported first quarter earnings last week. Net sales decreased 1%, attributed partly to the earthquake in Japan. Net comparable store sales for the first quarter were down 3%. The comparable sales for Gap, Banana Republic and Old Navy in North America were down 3%, 1%, and 2% respectively. However, total online sales increased 18%. [1]

Gap competes with other specialty retailers like Aeropostale (NYSE:ARO), American Eagle(NYSE:AEO), Abercrombie & Fitch(NYSE:ANF) and Urban Outfitters (NYSE:URBN). Our price estimate for Gap stock, at $29.83, stands well ahead of market price. We estimate that Gap stores contribute around  26% to the company’s stock value.

Going forward, the company is likely to face margin pressure, driven by rising cotton prices which could increase sourcing costs. While the company is expected to raise retail prices of its merchandise, the increases are unlikely to fully offset higher operating costs.

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After falling considerably in 2006, EBITDA margin for Gap stores increased from 2007 to 2010. In 2011, high cotton costs coupled with a slow pick up in consumer spending are expected to weigh down on margins. However, we expect the margins to recover from 2012 onwards and reach around 13.5% by the end of our forecast period.

See our full analysis for Gap stock here

Notes:
  1. Gap reports first quarter 2011 results [↩]