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Investment Overview for Gap Inc. (NYSE:GPS)
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- Old Navy Stores EBITDA Margin: EBITDA margins for Old Navy stores declined in 2011 due to an increase in cotton costs and excessive promotional activities in domestic operations. We expect margins to improve gradually as cotton prices decline and Old Navy enters international markets. We expect the figure to reach 23.1% by the end of the Trefis forecast period.
However, if the apparel market continues to be heavily promotional in nature and margins decline further to 27.2% by the end of the Trefis forecast period, there could be a downside of about 5% to our Trefis price estimate.
Conversely, if macro-economic conditions were to improve significantly and the promotional environment ceases to continue, margins could improve significantly to 17.5%. In this event there could be an upside of 5% to our Trefis price estimate.
- Internet Orders and Franchise Business Revenues: Revenues for internet related orders & the franchise business increased from $1 billion in 2007 to nearly $1.84 billion in 2011 driven by growth in online sales due to increasing internet penetration. We expect it to increase to around $5.21 billion by the end of our forecast period with further growth expected internationally in the direct channel as well as the franchise business.
However, if Gap fails to develop its direct channels adequately or loses out to its competitors, resulting in internet and franchise revenues staying at $2.5 billion by the end of the Trefis forecast period, there could be a downside of 10% to our Trefis price estimate.
Conversely, if Gap manages to outperform its peers and grows its scale in its direct business and revenues reach $4.7 billion by the end of the Trefis forecast period, there could be an upside of 10% to our Trefis price estimate.
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Gap is a global specialty retailer offering clothing, accessories and personal care products for men, women and children. It markets its products under the Gap, Old Navy, Banana Republic, Piperlime and Athleta brands.
Gap operates stores in the United States, Canada, the United Kingdom, France, Ireland, Japan. In November 2010 it began operations in China and Italy. The company also sells its products online through web-based stores for each of its brand. In addition to this, Gap has franchise agreements
with unaffiliated franchisees to operate Gap and Banana Republic stores in many countries.
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Gap stores are more valuable than Old Navy and Banana Republic stores in the US because of the following reasons:
Far greater number of Gap stores present in comparison to Old Navy and Banana Republic
The number of Gap stores operated by the company as of 2011 were 1,388. In comparison, the total number of Old Navy stores and Banana Republic stores were 1,016 and 622 respectively.
'Revenue per Square Foot' for Gap stores is higher than that of Old Navy and lower than that of Banana Republic
Gap stores generate revenue per square foot of $375, which is much higher than the $272 generated for Old Navy stores. It is slightly lower than the $468 generated by Banana Republic stores. As Banana Republic stores are fewer in number, their higher revenue per square foot does not entirely offset the value of the Gap stores.
Average size for Old Navy stores is much greater than that of Gap and Banana Republic
The average size of a typical Old Navy store is 18,160 per square foot. This compares to 9,901 per square foot and 8,442 per square foot for Gap and Banana Republic stores respectively. The Old Navy brand operates in the value priced segment where margins are lower. However, due to the significantly larger size of stores, the brand is able to generate significant value for the company by selling more units. Since the beginning of 2007, the company is looking to downsize the square footage of Old Navy stores. The trend was more clearly visible in 2011 and we expect this to continue going ahead.
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Continuing promotional environment in teen apparel market
The U.S. teen apparel market is highly promotional, where each retailer is trying to outsmart the other with a broader and deeper set of promotions. The trend is expected to continue until the U.S. economy recovers fully.
Gap's high paced international expansion
International expansion is one of the key long term strategies of Gap. The company is particularly focused on emerging economies such as China which is becoming the focal point of the global apparel industry. The company has been projecting international expansion as an alternative to its ailing domestic business.
Gap's reduction in its dependency on its North American specialty bricks and mortar business.
In its Q4 fiscal 2011 earnings, Gap's chairman and CEO, Glenn Murphy announced that a reduction in dependency on the North American specialty bricks and mortar business is one of the key initiatives of Gap going ahead. To accomplish that, Gap is increasing the scale of its direct business and reducing its net square footage of specialty stores in the domestic market.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on:
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