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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 a sudden rise in cotton costs and excessive promotional activities in domestic operations. The margins rebounded to 23.5% in 2012 with lower cotton prices and better product mix. We expect margins to improve gradually increase and reach 25% by the end of the Trefis forecast period.
However, if the apparel industry continues to be promotional and Gap misses out on some emerging fashion trends resulting in heavy markdowns, its margins can decline. If the figure comes down to 22% by the end of Trefis forecast period, there could be 5% downside to our price estimate.
Conversely, if macro-economic conditions improve, Gap maintains an efficient supply chain, and the intensity of promotional environment reduces, margins can improve. If the figure reaches 28%, there could be 5% upside 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 $2.26 billion in 2012 driven by growth in online sales due to increasing internet penetration. We expect it to increase to around $4.49 billion by the end of our forecast period with growth in U.S. online apparel industry and anticipated growth 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 increasing only to $3.8 billion by the end of the Trefis forecast period, there could be 5% downside to our price estimate.
Conversely, if Gap manages to outperform its peers and grows its scale in its direct business and revenues reach $5.25 billion by the end of the Trefis forecast period, there could be 5% upside to our 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 2012 were 1,379. In comparison, the total number of Old Navy stores and Banana Republic stores were 1,011 and 638 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 $390, which is much higher than the $300 generated for Old Navy stores. It is lower than $500 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 17,612 per square foot. This compares to 10,011 per square foot and 8,254 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 2012 and we expect this to continue going ahead.
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Aggressive marketing
About a year back, Gap launched the “Be Bright” campaign for its seasonal collection in collaboration with Ogilvy. Through this campaign, the retailer utilized fashion blogs to market its products and attract customers. Gap introduced a website, Styld.by, in partnership with popular fashion and lifestyle blogs such as Lookbook, FabSugar, etc. These blogs seem to be doing well for the retailer.
According to a 2011 Technorati report, consumer trust on traditional media has declined by 46% since 2006. Around 35% consumers trusted blogs to be credible sources of information and 19% agreed with the idea that they are better written than traditional media sources. Gap’s Styld.by blog partners collectively have about 1 million average unique monthly visitors. This has helped the retailer generate more interest among customers and improve its brand image. The impact was visible in its recently reported results.
Gap's targeted 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 has become the second largest apparel market in the world with booming middle class, rising disposable income and growing urbanization. The company opened 30 stores in China last year and plans to add 35 more in fiscal 2013. The retailer will also be opening its affordable luxury brand store Banana Republic in the region. The outlook of luxury market in China is encouraging as it is estimated that the region will have one-third share of global luxury market. Gap is looking to add 15-20 Old Navy stores in Japan, which provides ample opportunities for western apparel retailers. During fiscal 2013, Gap has about 15-20 Old Navy stores planned for Japan.
Gap's plans to tap the growing online industry in the U.S.
Online apparel sales in the U.S. is growing at a robust pace due to growing internet usage and proliferation of smartphones and tablets. eMarketer forecasts the online apparel sales to increase from about $45 billion in 2012 to $90 billion in 2016. To tap the market's potential, Gap launched an iPad app in 2010 to make its customer shopping experience more social. The retailer’s mobile-optimized sites enable customers to browse and shop online as well as locate a nearby store. It is also exploring omni-channel possibilities for its brands, which will allow it to serve its customers better.
Efforts to gain market share in the U.S.
While Gap Inc is consolidating its main brand networks in North America, it is looking at other ways to gain share in $300+ billion U.S. apparel market. Apart from expanding Banana Republic, the retailer is relying on smaller brands for the purpose. In an investor meeting held in April 2013, the company stated that it will focus on Athleta, Piperlime, Intermix, GapKids and babyGap to grow its business in North America. Through Athleta, Gap Inc offers performance driven sports apparel and footwear for women. The retailer is planning to expand the brand’s footprint in the U.S., which is currently limited to just 35 stores (2012). It opened about 25 Athleta stores in 2012 and has plans to add 30 more in the current fiscal year. With Lululemon, Athleta’s main competitor, struggling with bad publicity, we believe that it might be a good time for Athleta to expand. Additionally, Gap Inc is opening physical stores for its formerly exclusive online brand Piperlime (shoes, accessories and handbags) and is expanding its recently acquired Intermix (women’s fashion botique) to online channel. Moreover, GapKids and babyGap are popular brands in their respective segments.
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.
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